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Why Cash-Out Refinancing to Invest Doesn't Add Up

It may seem like an intriguing idea: Borrow against your home, either by refinancing and taking extra cash out or by opening a home equity line of credit, and then invest the money at a profit. Low mortgage-interest rates could make this seem like a viable option—especially if you consider that most mortgage interest is tax-deductible.

But the calculation is not as straightforward as comparing the potential mortgage interest rate to an expected return on investment. First, the refinance must make good financial sense on its own terms.

Refinancing your mortgage to get a lower rate can be a good option, as long as fees are lower than the potential interest savings and you plan to keep your home longer than it will take to recoup any closing costs.

Cash-out refinancing on its own—that is, refinancing for more than you owe on the original loan and pocketing the difference—could make refinancing less attractive, even if the interest rate on the new mortgage is lower.

For one thing, it will decrease the rate at which you are building equity. If you have 10 years left on a 30-year loan, for example, you are building equity more quickly than when you first got the loan, because a greater percentage of each month's payment is going toward the principal. Getting a new loan will "reset the clock," so that more of each payment is applied to interest instead of principal.

$150,000 30-year, fixed-rate mortgage at 4.5%

  Month 1, year 1 Month 240, year 20
Monthly payment $760.03 $760.03
Principal $197.53 $485.02
Interest $562.50 $275.00
Balance $149,802.47 $72,849.56

In addition, to keep monthly payments for the new mortgage close to your current monthly payments, you may need to extend the term of the loan, increasing the total amount of interest you'll pay.

Interest calculations aside, Rande Spiegelman, vice president of financial planning, Schwab Center for Financial Research, says he would never recommend cash-out refinancing in order to invest— not even if you could borrow at 4% and invest the money at 5% in tax-free municipal bonds. He advises, "Try to keep the personal residence completely separate from the investment portfolio. As millions of people learned in 2007, the house is not a piggy bank. It's a place to live."

There's an even bigger problem with investing the money from cash-out refinancing, according to Spiegelman: You're gambling with borrowed money. Whatever you invest in has the chance of losing money. Moreover, if you should lose your job or have your income reduced, you would still have to make payments on the loan. In the worst case, you risk losing your home. 

"Losing money in the market is bad enough. Losing borrowed money you still have to pay back is worse. Losing borrowed money in the market and the house you live in is unthinkable," Spiegelman says bluntly. "Our best advice would be to run, not walk, away from anyone suggesting such a thing."

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