How to invest $200k (from 2.25% cash out refinancing)?

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Topic Author
alexL
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Joined: Tue Dec 29, 2020 6:32 pm

How to invest $200k (from 2.25% cash out refinancing)?

Post by alexL »

The interests are so ridiculously low so I decided to take a portion of my equity out while doing refinancing.

I am getting a 2.25% 15-year loan. $200K of the loan is cash out.

I already max out my 401k and IRA for many years. I also have some taxable accounts with half stock index and half bond index.

What would be your suggestions for investing the 200k?

Updated with more info. below:

* Emergency funds: Yes for 6+ months.

* Debt: $220 k mortgage, nothing else

* Tax Filing status: Married filing jointly, with two dependent children
* Tax Rate: tax bracket? 22% Federal, 9.3% State: CA
* Residence: California
* Age: 44
* Current Assset:
Retirement accounts: 70-30 stock-bond split overall
401K: 700K
TIRA: 200K
Roth IRA: 100K

Taxable: 200K : 50-50 stock -bond split

Annual 401K contribution
* $19,500
* $19,500 employer (100% match)

The question is what to invest with additional $200K taken out from my $600K home equity at rate 2.25%? Or any adjustments to my overall investment plan?
Last edited by alexL on Tue Dec 29, 2020 10:40 pm, edited 2 times in total.
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vineviz
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by vineviz »

alexL wrote: Tue Dec 29, 2020 6:43 pm The interests are so ridiculously low so I decided to take a portion of my equity out while doing refinancing.

I am getting a 2.25% 15-year loan. $200K of the loan is cash out.

I already max out my 401k and IRA for many years. I also have some taxable accounts with half stock index and half bond index.

What would be your suggestions for investing the 200k?
Pay off the mortgage:)

Why are you paying 2.25% on the mortgage while earning roughly 1% on your bond index fund?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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FelixTheCat
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by FelixTheCat »

I wouldn't go into debt to invest.
Felix is a wonderful, wonderful cat.
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David Jay
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by David Jay »

Welcome to the forum!

We teach that the primary control knob for risk versus stability is one’s asset allocation - the ratio of stocks to bonds in your overall portfolio.

If you are comfortable with having half of your taxable account in bonds then a 100% stock allocation seems too aggressive for you. This being the case, “vineviz” (comment above) is correct, you should apply the $200,000 to your mortgage. Ask them to “ recast” the mortgage if you want a smaller payment and deliberately want to keep the loan for 15 years.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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HMSVictory
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by HMSVictory »

Posts like this make me think "here we go again"...... I've seen friends and family lose a house to foreclosure and it is a painful experience.

Please do not borrow on your house with "cheap" money to invest. It is foolish and you will not get rich doing this.

Borrowed at 2.25% to invest it at 1%... :oops:
Stay the course!
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Taylor Larimore
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Taylor Larimore »

alexL wrote: Tue Dec 29, 2020 6:43 pm The interests are so ridiculously low so I decided to take a portion of my equity out while doing refinancing.

I am getting a 2.25% 15-year loan. $200K of the loan is cash out.

I already max out my 401k and IRA for many years. I also have some taxable accounts with half stock index and half bond index.

What would be your suggestions for investing the 200k?
alexL:

Welcome to the Bogleheads Forum!

To answer your question, please use this LINK to The Three-Fund Portfolio.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
"Simplicity is the master key to financial success." -- Jack Bogle
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Watty
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Watty »

HMSVictory wrote: Tue Dec 29, 2020 7:34 pm Posts like this make me think "here we go again"...... I've seen friends and family lose a house to foreclosure and it is a painful experience.

Please do not borrow on your house with "cheap" money to invest. It is foolish and you will not get rich doing this.

Borrowed at 2.25% to invest it at 1%... :oops:
+1

Investing and earning a higher return is harder than it sounds because you have large sequence of returns risk. Here is a very simplistic example of that which I have posted before.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://personal.vanguard.com/us/insigh ... llocations

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
Valueinvestor2
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Valueinvestor2 »

alexL wrote: Tue Dec 29, 2020 6:43 pm The interests are so ridiculously low so I decided to take a portion of my equity out while doing refinancing.

I am getting a 2.25% 15-year loan. $200K of the loan is cash out.

I already max out my 401k and IRA for many years. I also have some taxable accounts with half stock index and half bond index.

What would be your suggestions for investing the 200k?
I don’t disagree with this approach. Seems a little ridiculous that you are being criticized. Math is math. A dummy can make 7% annualized in index funds over the long haul and you are paying 2.25%. It’s math.

Obviously some things to consider are income security and how long you plan to stay in the house.

Personally I am not doing this now bc I buy individual companies and right now I don’t see any great opportunities. If the market dips it’s a no brainer IMO. Again, math is math.
Topic Author
alexL
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by alexL »

vineviz wrote: Tue Dec 29, 2020 7:24 pm
alexL wrote: Tue Dec 29, 2020 6:43 pm The interests are so ridiculously low so I decided to take a portion of my equity out while doing refinancing.

I am getting a 2.25% 15-year loan. $200K of the loan is cash out.

I already max out my 401k and IRA for many years. I also have some taxable accounts with half stock index and half bond index.

What would be your suggestions for investing the 200k?
Pay off the mortgage:)

Why are you paying 2.25% on the mortgage while earning roughly 1% on your bond index fund?
Could you please share one mainstream bond index fund earning 1%?
Topic Author
alexL
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by alexL »

HMSVictory wrote: Tue Dec 29, 2020 7:34 pm Posts like this make me think "here we go again"...... I've seen friends and family lose a house to foreclosure and it is a painful experience.

Please do not borrow on your house with "cheap" money to invest. It is foolish and you will not get rich doing this.

Borrowed at 2.25% to invest it at 1%... :oops:
Please respect anyone, no one on this forum is doing "Borrowed at 2.25% to invest it at 1%" .
Topic Author
alexL
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by alexL »

Basically your argument is that investing and earning higher than 2.25% is hard and has large risks. With the same argument, what is your investment expectation? And why are you investing at all if it barely catches up with the inflation rate?
Watty wrote: Tue Dec 29, 2020 7:47 pm
HMSVictory wrote: Tue Dec 29, 2020 7:34 pm Posts like this make me think "here we go again"...... I've seen friends and family lose a house to foreclosure and it is a painful experience.

Please do not borrow on your house with "cheap" money to invest. It is foolish and you will not get rich doing this.

Borrowed at 2.25% to invest it at 1%... :oops:
+1

Investing and earning a higher return is harder than it sounds because you have large sequence of returns risk. Here is a very simplistic example of that which I have posted before.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://personal.vanguard.com/us/insigh ... llocations

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
ohboy!
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by ohboy! »

This comes up three ways.

Borrow from house to invest
New cash, pay house or invest
Invested money, cash out to pay house or no

For me the answer is always the same. Pay off the house first. I hate debt. It’s the same topic almost every day.
Topic Author
alexL
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by alexL »

Valueinvestor2 wrote: Tue Dec 29, 2020 7:59 pm
alexL wrote: Tue Dec 29, 2020 6:43 pm The interests are so ridiculously low so I decided to take a portion of my equity out while doing refinancing.

I am getting a 2.25% 15-year loan. $200K of the loan is cash out.

I already max out my 401k and IRA for many years. I also have some taxable accounts with half stock index and half bond index.

What would be your suggestions for investing the 200k?
I don’t disagree with this approach. Seems a little ridiculous that you are being criticized. Math is math. A dummy can make 7% annualized in index funds over the long haul and you are paying 2.25%. It’s math.

Obviously some things to consider are income security and how long you plan to stay in the house.

Personally I am not doing this now bc I buy individual companies and right now I don’t see any great opportunities. If the market dips it’s a no brainer IMO. Again, math is math.
Finally someone who is not bashing me with the fake "you only get 1% return" argument.
Topic Author
alexL
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by alexL »

ohboy! wrote: Tue Dec 29, 2020 8:10 pm This comes up three ways.

Borrow from house to invest
New cash, pay house or invest
Invested money, cash out to pay house or no

For me the answer is always the same. Pay off the house first. I hate debt. It’s the same topic almost every day.
I won't have a mortgage in the first place if I hated debts. The good side is that the mortgage enabled me to buy a house which now has >$600k equity. The key should be about the nature/purpose of debts.
Valueinvestor2
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Valueinvestor2 »

alexL wrote: Tue Dec 29, 2020 8:12 pm
Valueinvestor2 wrote: Tue Dec 29, 2020 7:59 pm
alexL wrote: Tue Dec 29, 2020 6:43 pm The interests are so ridiculously low so I decided to take a portion of my equity out while doing refinancing.

I am getting a 2.25% 15-year loan. $200K of the loan is cash out.

I already max out my 401k and IRA for many years. I also have some taxable accounts with half stock index and half bond index.

What would be your suggestions for investing the 200k?
I don’t disagree with this approach. Seems a little ridiculous that you are being criticized. Math is math. A dummy can make 7% annualized in index funds over the long haul and you are paying 2.25%. It’s math.

Obviously some things to consider are income security and how long you plan to stay in the house.

Personally I am not doing this now bc I buy individual companies and right now I don’t see any great opportunities. If the market dips it’s a no brainer IMO. Again, math is math.
Finally someone who is not bashing me with the fake "you only get 1% return" argument.
Issue with bogleheads is that it is a religion. If you go against any teachings of Mr. Bogle (who I admire and respect myself) you will be crucified.

Most of BH philosophy is true for most people mainly due to human behavior (having a plan for when markets go south) and math (not paying 1% in fees).

When you post on this forum you have to understand who you are posting to and take their advice with their perspective in mind. More power to you if you want to invest your equity vs let it sit there not working for you as long as you know your personal situation and the risks involved.

Now, anyone want to challenge that 7% is greater than 2.25%?

Cheers!
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Taylor Larimore
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Taylor Larimore »

alexL wrote:Could you please share one mainstream bond index fund earning 1%?
alexL:

Vanguard Total Bond Market Index Fund has returned +7.52% so far this year.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The costs of most bond funds are excessive, giving low-cost bond index funds a remarkable head start."
"Simplicity is the master key to financial success." -- Jack Bogle
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Wiggums
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Wiggums »

Taylor Larimore wrote: Tue Dec 29, 2020 8:26 pm
alexL wrote:Could you please share one mainstream bond index fund earning 1%?
alexL:

Vanguard Total Bond Market Index Fund has returned +7.52% so far this year.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The costs of most bond funds are excessive, giving low-cost bond index funds a remarkable head start."
+1
bling
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by bling »

nothing wrong with taking that 200k and dumping it into your AA. even at 50/50 stock/bonds the odds are in your favor that you'll beat 2.25%. before you use any leverage, just run through the worst case scenario (foreclosure/bankruptcy/etc) so you fully understand the risks. what you're doing here (in my mind) barely even counts as leverage.

some BHs really really hate debt. i view it as just another tool in the toolbox that if used responsibly can increase your expected return (and potentially risk).
Last edited by bling on Tue Dec 29, 2020 8:32 pm, edited 1 time in total.
heilwasser
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by heilwasser »

If you hold a bond fund, that portion is yielding ~1%. OP, I think what you are doing is a good idea. 2.25% is a great rate, and many would be in no rush to pay it off. Assuming you are not bond heavy in your portfolio, I would put all the money in line with your current AA, or just dump it all in stocks. I think the odds are good you will come out ahead in 15 years.
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Watty
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Watty »

alexL wrote: Tue Dec 29, 2020 8:10 pm Basically your argument is that investing and earning higher than 2.25% is hard and has large risks. With the same argument, what is your investment expectation? And why are you investing at all if it barely catches up with the inflation rate?
There are all sorts of opinions about what the future returns will be but when you are not making withdrawals it does not matter if your yearly returns are something like;

10%, 20%, -40% or the other way around.
checkyourmath
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by checkyourmath »

I would put it all in the bond market. It is much more stable than the housing market. Taylor has a good point the bond market absolutely crushed it this past year. The future looks super bright for the bond market. I listen to a great talk the other day from a Yale professor on bond price and yield. Worse case scenario they drop the yield but the price will go up. The bond market makes sense essentially since it is larger than the stock market. I think the make is easy borrow at 2ish percent and make 7ish percent. 7-2 = 5. You will get 5 percent. Keep up the great work!
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sergeant
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by sergeant »

You could have borrowed at a cheaper rate than a home loan at 2.25%.

Those comparing your rate to what bonds are currently yielding are correct since you are holding bonds in your current AA.

Since you have already decided to do this how about you just invest it in an AA you feel comfortable with? You will be losing a little over 1% a year on that portion that goes into bonds.

You are making the mistake of comparing possible equity returns with your 2.25% rate. Good luck. Seriously.

Some of those you have dismissed are extremely knowledgeable.
AA- 20+ Years of Expenses Fixed Income/The remainder in Equities.
ohboy!
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by ohboy! »

alexL wrote: Tue Dec 29, 2020 8:17 pm
ohboy! wrote: Tue Dec 29, 2020 8:10 pm This comes up three ways.

Borrow from house to invest
New cash, pay house or invest
Invested money, cash out to pay house or no

For me the answer is always the same. Pay off the house first. I hate debt. It’s the same topic almost every day.
I won't have a mortgage in the first place if I hated debts. The good side is that the mortgage enabled me to buy a house which now has >$600k equity. The key should be about the nature/purpose of debts.
I have similar equity and its rising $10k a month lately. It’s roughly half my net worth and fully realize Im in the majority to pay off house in less than 5 years, especially with these rates. I just see equities as much more risky at this point. Of course 4 years ago had I have bought twice as much house with the banks encouragement I suppose Id be watching a $20k a month increasing redfin balance.
ohboy!
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by ohboy! »

By the way, while you’re gambling with home equity you might as well go on hedgefundies adventure! Turn your $200k to $20m.
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sergeant
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by sergeant »

Taylor Larimore wrote: Tue Dec 29, 2020 8:26 pm
alexL wrote:Could you please share one mainstream bond index fund earning 1%?
alexL:

Vanguard Total Bond Market Index Fund has returned +7.52% so far this year.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The costs of most bond funds are excessive, giving low-cost bond index funds a remarkable head start."
Taylor, are you recommending that folks mortgage their homes to invest in TBM? That is exactly what OP has done.
AA- 20+ Years of Expenses Fixed Income/The remainder in Equities.
Valueinvestor2
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Valueinvestor2 »

ohboy! wrote: Tue Dec 29, 2020 8:44 pm By the way, while you’re gambling with home equity you might as well go on hedgefundies adventure! Turn your $200k to $20m.
Since when is investing in index funds and bond funds gambling?
placeholder
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by placeholder »

I've seen lots of people here with mortgages and fixed income allocations so there's no difference in this case.
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whodidntante
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by whodidntante »

I recommend a careful reading of the book Lifecycle Investing. You didn't supply much information in your original post, but leverage can be quite useful if you can navigate the pitfalls.
ohboy!
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by ohboy! »

sergeant wrote: Tue Dec 29, 2020 8:46 pm
Taylor Larimore wrote: Tue Dec 29, 2020 8:26 pm
alexL wrote:Could you please share one mainstream bond index fund earning 1%?
alexL:

Vanguard Total Bond Market Index Fund has returned +7.52% so far this year.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The costs of most bond funds are excessive, giving low-cost bond index funds a remarkable head start."
Taylor, are you recommending that folks mortgage their homes to invest in TBM? That is exactly what OP has done.
:shock:
Willmunny
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Willmunny »

Welcome to the forum.

The issue I see is the historically low bond yields now. I know BND and other bond funds have done well this year due to capital gains arising from the large rate decline earlier this year. But at the current yield (around 1.1%), to see another 7% return in BND next year, we would be looking at a negative yield. One has to ask oneself is it reasonably likely that investors will accept a negative yield on a fund with interest rate risk and credit risk? I've thought about it, and my conclusion is no.

The other thing is you have to pay tax on your interest received from the bonds held in the taxable account, and that additional tax will be at your highest marginal rate.

I would suggest Larry Swedroe's book on bonds if you are looking for further reading on the subject.
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alexL
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by alexL »

whodidntante wrote: Tue Dec 29, 2020 9:01 pm I recommend a careful reading of the book Lifecycle Investing. You didn't supply much information in your original post, but leverage can be quite useful if you can navigate the pitfalls.
Thanks for the book suggestion. I love reading (listening to)books. I don't have leverage. What more information do you need? I am happy to provide.
Topic Author
alexL
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by alexL »

Willmunny wrote: Tue Dec 29, 2020 9:22 pm Welcome to the forum.

The issue I see is the historically low bond yields now. I know BND and other bond funds have done well this year due to capital gains arising from the large rate decline earlier this year. But at the current yield (around 1.1%), to see another 7% return in BND next year, we would be looking at a negative yield. One has to ask oneself is it reasonably likely that investors will accept a negative yield on a fund with interest rate risk and credit risk? I've thought about it, and my conclusion is no.

The other thing is you have to pay tax on your interest received from the bonds held in the taxable account, and that additional tax will be at your highest marginal rate.

I would suggest Larry Swedroe's book on bonds if you are looking for further reading on the subject.
This is a good example of insightful comments. Essentially you are suggesting avoid bond for my extra cash. I am still young (40+) and already have 30% bond in my portfolio.

Thank you sir!
Ron Ronnerson
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Ron Ronnerson »

I am curious about the recommendations to this question as well. I’m in the process of doing a $150k cash-out refinance (30-year term at 2.375%). I posted about it here a week ago: viewtopic.php?f=2&t=333575

I’m planning to set aside some money to cover the higher mortgage payment as a result of taking cash out and perhaps add a little bit of cushion to my emergency fund too. I am thinking of also maxing out retirement space, something I haven’t been able to do before. I do plan to look for arbitrage opportunities as well (for instance, checking accounts paying 3% or higher if you’re willing to jump through some hoops).

Personally, I don’t think it’s a bad bet that you’re taking. However, you should understand that it is actually a bet. The key difference is that putting money toward a mortgage is a guaranteed return of 2.25% while investing the money doesn’t guarantee that outcome. Since the risk level is anything but the same, it’s not an apples-to-apples comparison.

That being said, the odds are (likely?) in your favor if you do invest it. I personally like the idea of leveraging low-interest debt and taking risk when there is a long enough time horizon but this approach is definitely not something everyone agrees with (as you can see from some of the responses you've gotten).

I actually got a bit more support for my plan than what you’re seeing so far on this thread even though my primary motive for taking cash out of my house is in order to increase my spending. Our circumstances are likely fairly different, though.
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whodidntante
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by whodidntante »

alexL wrote: Tue Dec 29, 2020 9:30 pm
whodidntante wrote: Tue Dec 29, 2020 9:01 pm I recommend a careful reading of the book Lifecycle Investing. You didn't supply much information in your original post, but leverage can be quite useful if you can navigate the pitfalls.
Thanks for the book suggestion. I love reading (listening to)books. I don't have leverage. What more information do you need? I am happy to provide.
The moment you take 200k out of your home equity to invest in... something, your portfolio is leveraged.

You are asking a portfolio question, so my suggestion is that you follow this format.
viewtopic.php?f=1&t=6212
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alexL
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by alexL »

bling wrote: Tue Dec 29, 2020 8:31 pm nothing wrong with taking that 200k and dumping it into your AA. even at 50/50 stock/bonds the odds are in your favor that you'll beat 2.25%. before you use any leverage, just run through the worst case scenario (foreclosure/bankruptcy/etc) so you fully understand the risks. what you're doing here (in my mind) barely even counts as leverage.

some BHs really really hate debt. i view it as just another tool in the toolbox that if used responsibly can increase your expected return (and potentially risk).
I used to hate debts also. As I age (now 40+),I also realize they are just tools for responsible people.
000
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by 000 »

Borrowing at 2.25% while investing in bonds yielding <1.5% is a naked speculation on interest rate movements.
6bquick
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by 6bquick »

000 wrote: Tue Dec 29, 2020 9:37 pm Borrowing at 2.25% while investing in bonds yielding <1.5% is a naked speculation on interest rate movements.
OP is 50:50, IIRC. So, it's a 200k non-callable loan at 2.25% for 15 yrs to get a historic return of right around 7% annually*. I think I read it's also like 33% of his actual equity he's pulling out here so even losing 100% of principle will likely not result in foreclosure.

Not something I would choose to do, but calling it 'naked speculation' seems hyperbolic.

*I know, I know.. past performance blah blah. simply using it for reference.
Last edited by 6bquick on Tue Dec 29, 2020 9:55 pm, edited 1 time in total.
Topic Author
alexL
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Joined: Tue Dec 29, 2020 6:32 pm

Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by alexL »

whodidntante wrote: Tue Dec 29, 2020 9:35 pm
alexL wrote: Tue Dec 29, 2020 9:30 pm
whodidntante wrote: Tue Dec 29, 2020 9:01 pm I recommend a careful reading of the book Lifecycle Investing. You didn't supply much information in your original post, but leverage can be quite useful if you can navigate the pitfalls.
Thanks for the book suggestion. I love reading (listening to)books. I don't have leverage. What more information do you need? I am happy to provide.
The moment you take 200k out of your home equity to invest in... something, your portfolio is leveraged.

You are asking a portfolio question, so my suggestion is that you follow this format.
viewtopic.php?f=1&t=6212
Aha! Here we go:
* Emergency funds: Yes for 6+ months.

* Debt: $220 k mortgage, nothing else

* Tax Filing status: Married filing jointly, with two dependent children
* Tax Rate: tax bracket? 22% Federal, 9.3% State: CA
* Residence: California
* Age: 44
* Current Assset:
Retirement accounts: 70-30 stock-bond split overall
401K: 700K
TIRA: 200K
Roth IRA: 100K

Taxable: 200K : 50-50 stock -bond split

Annual 401K contribution
* $19,500
* $19,500 employer (100% match)

Ok, the question is what to invest with additional $200K taken out from my $600K home equity at rate 2.25%? Or any adjustments to my overall investment plan?
Last edited by alexL on Tue Dec 29, 2020 10:04 pm, edited 1 time in total.
mbasherp
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by mbasherp »

In reading between the lines of the posts and responses here, I think this is something OP might perceive as an acceptable response:

Do whatever you want with it because historically, you are likely (not guaranteed) to outperform 2.25% annually with a portfolio over 15 years. But be aware that putting any of the money into bonds is most likely to be negative arbitrage in the current environment. You are unlikely to come out ahead borrowing X at 2.25% to earn less than that. This should be clear.

The people whose feedback you seem to be disliking are telling you to trust the bond market, which is both larger than the stock market and correct about the future more often. There’s no way to achieve higher returns with bonds (a mortgage) leveraged on other bonds of a similar risk level. Your plan hinges on taking more risk to get a better return. Although, you may very well succeed.

I would personally say that this is only worth doing if you’re comfortable going 100% equities with it and sure you can stay the course. I am basically 100% equities but I haven’t ever pulled cash out of my home.
DH0
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by DH0 »

Many Bogleheads hate debt for reasons that are more emotional than quantitative. Others see it as a useful tool when managed appropriately, esp at a 2% interest rate.

I look at it this way: given your current networth if you were to buy the house today, how much would you tie up in the downpayment? 20–30% and leave the rest in a 3-fund portfolio? Statistically, this should give you the best return. However, if you were 'debt-averse', you would be putting just about everything that's not tax advantaged toward the mortgage.

If you're not 'debt averse' it makes the most sense to invest it in your regular asset allocation. You will need to purchase at least some equities with your 200k to have a high probability of outperforming the 2% interest you're paying on the mortgage. On the other hand, I wouldn't want to put it in 100% equities given the sequence of returns risk in the event of a crash. So long story short, think deeply about your desired overall asset allocation, which should not be 100% equities, and plop the refi check in.
bling
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by bling »

forget the cash out.

every paycheck, after paying off all the bills, what do you do with the extra money? do you invest it or do you pay extra into your mortgage? that's your answer.

why are you asking "what" to invest in? why does the dollar amount matter? isn't your target AA sufficient to answer the question?
Last edited by bling on Tue Dec 29, 2020 10:11 pm, edited 1 time in total.
000
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by 000 »

6bquick wrote: Tue Dec 29, 2020 9:50 pm
000 wrote: Tue Dec 29, 2020 9:37 pm Borrowing at 2.25% while investing in bonds yielding <1.5% is a naked speculation on interest rate movements.
OP is 50:50, IIRC. So, it's a 200k non-callable loan at 2.25% for 15 yrs to get a historic return of right around 7% annually*. I think I read it's also like 33% of his actual equity he's pulling out here so even losing 100% of principle will likely not result in foreclosure.

Not something I would choose to do, but calling it 'naked speculation' seems hyperbolic.

*I know, I know.. past performance blah blah. simply using it for reference.
Best predictor of future bond returns is the yield. Interest rates HAVE to go down for this to work, or OP needs to put all his bonds in Corporates / Junk / Emerging Markets bonds.
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whodidntante
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by whodidntante »

alexL wrote: Tue Dec 29, 2020 9:52 pm
whodidntante wrote: Tue Dec 29, 2020 9:35 pm
alexL wrote: Tue Dec 29, 2020 9:30 pm
whodidntante wrote: Tue Dec 29, 2020 9:01 pm I recommend a careful reading of the book Lifecycle Investing. You didn't supply much information in your original post, but leverage can be quite useful if you can navigate the pitfalls.
Thanks for the book suggestion. I love reading (listening to)books. I don't have leverage. What more information do you need? I am happy to provide.
The moment you take 200k out of your home equity to invest in... something, your portfolio is leveraged.

You are asking a portfolio question, so my suggestion is that you follow this format.
viewtopic.php?f=1&t=6212
Aha! Here we go:
* Emergency funds: Yes for 6+ months.

* Debt: $220 k mortgage, nothing else

* Tax Filing status: Married filing jointly, with two dependent children
* Tax Rate: tax bracket? 22% Federal, 9.3% State: CA
* Residence: California
* Age: 44
* Current Assset:
Retirement accounts: 70-30 stock-bond split overall
401K: 700K
TIRA: 200K
Roth IRA: 100K

Taxable: 200K : 50-50 stock -bond split

Annual 401K contribution
* $19,500
* $19,500 employer (100% match)

Ok, the question is what to invest with additional $200K taken out from my $600K home equity at rate 2.25%?
OK, assuming you are still far from your number then I think leverage is reasonable and I would buy equities with it. But I would at least read Lifecycle Investing and then draw your own conclusion.

Although, you could just exchange the bonds for stocks and save the 2.25%. The yield spread is going to be really unfavorable unless you are far out on the bond risk spectrum. As for which equities, I would follow my desired stock allocation. This is made up of low cost mutual funds and ETFs, approximately 50:50 USA and ex-USA with an EM overweight, with a tilt to small and value.

With the amounts you have in IRAs and taxable accounts, you will be able to borrow more cheaply than 2.25%, though not at a long-term fixed rate. There's a post I made today on this thread that identifies some options for cheap borrowing.
viewtopic.php?f=22&t=333893&newpost=569 ... ead#unread
Topic Author
alexL
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by alexL »

bling wrote: Tue Dec 29, 2020 10:08 pm forget the cash out.

every paycheck, after paying off all the bills, what do you do with the extra money? do you invest it or do you pay extra into your mortgage? that's your answer.

why are you asking "what" to invest in? why does the dollar amount matter? isn't your target AA sufficient to answer the question?
Thank you. The dollar amount may matter due to the Dollar-cost averaging effect. I am comfortable to invest monthly in small amount. I am kind of nervous to dump big money on something, worrying about buying it at highest points.
bling
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Joined: Sat Jan 21, 2012 12:49 pm

Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by bling »

alexL wrote: Tue Dec 29, 2020 10:15 pm
bling wrote: Tue Dec 29, 2020 10:08 pm forget the cash out.

every paycheck, after paying off all the bills, what do you do with the extra money? do you invest it or do you pay extra into your mortgage? that's your answer.

why are you asking "what" to invest in? why does the dollar amount matter? isn't your target AA sufficient to answer the question?
Thank you. The dollar amount may matter due to the Dollar-cost averaging effect. I am comfortable to invest monthly in small amount. I am kind of nervous to dump big money on something, worrying about buying it at highest points.
statistically speaking lump sum beats DCA most of the time.
Topic Author
alexL
Posts: 68
Joined: Tue Dec 29, 2020 6:32 pm

Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by alexL »

whodidntante wrote: Tue Dec 29, 2020 10:13 pm
alexL wrote: Tue Dec 29, 2020 9:52 pm
whodidntante wrote: Tue Dec 29, 2020 9:35 pm
alexL wrote: Tue Dec 29, 2020 9:30 pm
whodidntante wrote: Tue Dec 29, 2020 9:01 pm I recommend a careful reading of the book Lifecycle Investing. You didn't supply much information in your original post, but leverage can be quite useful if you can navigate the pitfalls.
Thanks for the book suggestion. I love reading (listening to)books. I don't have leverage. What more information do you need? I am happy to provide.
The moment you take 200k out of your home equity to invest in... something, your portfolio is leveraged.

You are asking a portfolio question, so my suggestion is that you follow this format.
viewtopic.php?f=1&t=6212
Aha! Here we go:
* Emergency funds: Yes for 6+ months.

* Debt: $220 k mortgage, nothing else

* Tax Filing status: Married filing jointly, with two dependent children
* Tax Rate: tax bracket? 22% Federal, 9.3% State: CA
* Residence: California
* Age: 44
* Current Assset:
Retirement accounts: 70-30 stock-bond split overall
401K: 700K
TIRA: 200K
Roth IRA: 100K

Taxable: 200K : 50-50 stock -bond split

Annual 401K contribution
* $19,500
* $19,500 employer (100% match)

Ok, the question is what to invest with additional $200K taken out from my $600K home equity at rate 2.25%?
OK, assuming you are still far from your number then I think leverage is reasonable and I would buy equities with it. But I would at least read Lifecycle Investing and then draw your own conclusion.

Although, you could just exchange the bonds for stocks and save the 2.25%. The yield spread is going to be really unfavorable unless you are far out on the bond risk spectrum. As for which equities, I would follow my desired stock allocation. This is made up of low cost mutual funds and ETFs, approximately 50:50 USA and ex-USA with an EM overweight, with a tilt to small and value.

With the amounts you have in IRAs and taxable accounts, you will be able to borrow more cheaply than 2.25%, though not at a long-term fixed rate. There's a post I made today on this thread that identifies some options for cheap borrowing.
viewtopic.php?f=22&t=333893&newpost=569 ... ead#unread
Thank you again for your time!

Just to confirm if the following book is what you recommend:

Lifecycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio
by Ian Ayres (Author), Barry Nalebuff (Author)
6bquick
Posts: 195
Joined: Sat Mar 26, 2016 8:56 pm

Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by 6bquick »

000 wrote: Tue Dec 29, 2020 10:10 pm
6bquick wrote: Tue Dec 29, 2020 9:50 pm
000 wrote: Tue Dec 29, 2020 9:37 pm Borrowing at 2.25% while investing in bonds yielding <1.5% is a naked speculation on interest rate movements.
OP is 50:50, IIRC. So, it's a 200k non-callable loan at 2.25% for 15 yrs to get a historic return of right around 7% annually*. I think I read it's also like 33% of his actual equity he's pulling out here so even losing 100% of principle will likely not result in foreclosure.

Not something I would choose to do, but calling it 'naked speculation' seems hyperbolic.

*I know, I know.. past performance blah blah. simply using it for reference.
Best predictor of future bond returns is the yield. Interest rates HAVE to go down for this to work, or OP needs to put all his bonds in Corporates / Junk / Emerging Markets bonds.
I don't disagree. except, per OP, there's a very good chance that 100k+ of this 200k ends up in equities. that will probably* affect the overall return of this 200k loan positively on a 15yr time horizon, no?

*I know, I know.. past performance blah blah.
drumboy256
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by drumboy256 »

Bitcoin at this point since that wasn’t the smartest move.
Promise is one thing. Fulfilling that promise is quite another. - Sir Alex Ferguson
Big Dog
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by Big Dog »

Given your conservative asset allocation (40:60), borrowing to invest makes no sense to me. Pay the money back, and change your AA if you want to get more aggressive.
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Re: How to invest $200k (from 2.25% cash out refinancing)?

Post by ChinchillaWhiplash »

alexL wrote: Tue Dec 29, 2020 10:15 pm
bling wrote: Tue Dec 29, 2020 10:08 pm forget the cash out.

every paycheck, after paying off all the bills, what do you do with the extra money? do you invest it or do you pay extra into your mortgage? that's your answer.

why are you asking "what" to invest in? why does the dollar amount matter? isn't your target AA sufficient to answer the question?
Thank you. The dollar amount may matter due to the Dollar-cost averaging effect. I am comfortable to invest monthly in small amount. I am kind of nervous to dump big money on something, worrying about buying it at highest points.
Do you believe that markets will go up in 15 yrs? If so, investing lump sum should not be a problem. What bond fund are you holding in taxable? Might be worth looking info some in a tax free CA muni fund for the tax advantaged yield.
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