Loan benefits

Do I need to refinance in cash to finance my investments?

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You can withdraw equity in your home for virtually any purpose, including investing. But is it a good idea to risk your home for investments? (Shutterstock)

If you’ve been in your home for a while, you’ve probably built up some equity – the difference between what you still owe on your current mortgage and the value of your home. You can use equity for virtually anything, including financing stock purchases or other investments.

When the stock market is doing well and mortgage interest rates are low, you may be wondering if refinancing and taking out the equity in your home to invest in stocks is a smart move. Investing can pay off, but it’s also inherently risky.

So when is cash-out refinancing to finance your investments a good strategy, and when is it a mistake? Let’s look at the things to consider.

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What is a cash refinance and how does it work?

Refinancing by collection turns the equity in your home into cash. It replaces your existing mortgage with a new one for more than you currently owe and allows you to pocket the difference between the two balances in cash, minus closing costs.

A cash refinance has two main advantages. This turns the equity in your home into cash, and your new mortgage could come with a lower interest rate, a lower monthly payment, or possibly both.

Withdraw equity from a home to invest

In the second quarter of 2021, 51% of homeowners chose cash refinance, up from 38% in the first quarter of 2021, according to a report by Freddie Mac. When you withdraw the equity accumulated in your home, you can use it for whatever you want.

You can use the extra money to pay for an unexpected emergency, pay off debt, or finance home improvement to add value to your home. You can use the money to start a new business or buy a second home. You can even buy stocks with the proceeds of your cash refinance.

Use equity to buy shares

More than half of households have investments in the stock market, according to Pew Research. When mortgage interest rates are low or the stock market is booming, using the equity in your home to fund an investment can be lucrative. But investing in the stock market also comes with risks, including rising interest rates, taxes, and fluctuations in the economy.

Investing in stocks can be profitable, but comes with no guarantee of gains. It is possible that you invest your capital and lose all of your investment. And remember that while your investments may generate money, you will also pay interest on the equity in your home that you have borrowed.

Using equity to buy an investment property

Whether you want to buy a second home or an investment property to rent out and generate income, using the equity in a cash refinance can save you from dipping into your savings to fund the purchase. Since real estate tends to fluctuate less erratically than the stock market, your investment property will likely increase in value over time, with less risk of your investment losing value.

And while it’s easier to buy stocks than real estate, there are more potential tax benefits to investing in real estate.

Advantages and disadvantages of cash refinancing to invest

Despite all the advantages, a withdrawal refi is not always the best option if you need extra money to invest. Also, depending on the type of investment you want to make, the pros and cons will likely vary.

Advantages

  • You may have accumulated considerable equity in your home, which may mean access to a significant amount of money to invest.
  • A cash refinance may offer a lower interest rate than a home equity loan or home equity line of credit (HELOC).
  • You may be able to lower your monthly payments, giving you extra money each month to invest.
  • You may be able to take advantage of the mortgage interest deduction on a cash refinance if you use some of the money to buy, build, or make substantial improvements and renovations to your home.

The inconvenients

  • Fees and closing costs can be high, up to 5% of your total loan amount.
  • It can take 30-60 days or more to get your money back from a cash refinance, which means you could miss your investment opportunity.
  • Investing in stocks is risky and you could lose the amount of equity you have invested.
  • If you can’t make your new mortgage payments, you risk foreclosure. Generally, it can take a long time to see a profit on your investment.

With Credible, you can easily compare mortgage refinance rates from several lenders.

Should you use the equity in your home to finance your investments?

When investing, it’s important to remember that most people make their money over the long term, not overnight. If you have retirement and emergency funds set aside for a rainy day, the stock market may make a profit on the money you invest.

However, cash refinancing to fund stock purchases is rarely a good idea for most homeowners. Here’s why:

  • The stock market is volatile. Since the start of the coronavirus pandemic, the stock market has seen a series of lows and highs.
  • The stock market is a long game. The stock market is best for patient investors, generally offering long-term returns. Markets can move quickly and you can lose money overnight. It can take years to recoup losses.
  • There is no return guarantee. Investing is an inherently risky business. A positive return on your investment is never guaranteed. And even if your investments increase, you will continue to pay interest on the capital you have borrowed.
  • Replacing a sure thing with a risk. Investing the equity in your home on the stock market puts that money at risk. It’s usually safer to leave the equity in your home.
  • The stock market is complicated. Buying individual stocks is complex and nuanced. The average owner may not have the knowledge to invest in the stock market and see a positive return.

What to do with your capital instead

Investing in the stock market is far from the only way to put your equity to work for you. Here are some more:

  • Finance home improvements, repairs or renovations. Home improvement projects and home renovations can add value to your home. Whether it’s revamping your kitchen or adding a new deck or windows, when it comes to selling your home, you might find that the right extras add big capital.
  • Pay off or consolidate your higher interest debt. A cash refinance can offer a lower interest rate than many credit cards or high interest loans. Consolidation of your debts can also lower your monthly payments and may even increase your credit score. But keep in mind that your home could be at risk if you don’t make the payments on your new mortgage.
  • Build or add to an emergency fund. Unexpected emergencies happen. If you’re worried that a hospital stay or major home repair will deplete your savings, using the equity built up in your home to start or add to an emergency fund can reassure you. to be safe.
  • Make a big purchase. Maybe you’ve been saving up for a while to make a big purchase, but still can’t come up with the money you’ll need to see it happen. Tapping into the equity in your home can be the answer. Just be sure to weigh the pros and cons of using equity for a big purchase.
  • Pay for school. You can use a cash refinance to help fund your child’s education, or to pursue your own degree, increasing your income for years to come.

Other ways to invest

Investing is one of the best ways to grow your money, if done responsibly. Regardless of your age, income, or career, many investments can be less risky than buying individual stocks:

  • Mutual fund – If you’re saving for a long-term goal or for your retirement, mutual funds offer a low-cost way to invest while limiting the risk of loss because your money is spread across multiple investments.
  • IRA — You can set up an IRA with your bank, credit union, or other financial institution. It allows you to save for your retirement tax-free or tax-deferred.
  • 401(k)— An employer-sponsored 401(k) is a retirement savings plan that offers tax benefits to the investor. Generally, a portion of your salary, which can be doubled by your employer, is paid directly into an investment account. You will not be taxed on the winnings until you withdraw the money from the account.
  • CDs— Certificates of deposit (CDs) are federally insured savings accounts that offer a fixed rate of interest over a specific period of time, usually one, three or five years. But if you withdraw your money early, you’ll probably have to pay a fee.
  • Real estate – Investing in real estate can provide a passive income stream. It takes more money and time than investing in the stock market, but it can also be less risky.
  • High Yield Savings Accounts — High yield savings accounts offer a higher rate of return than standard savings accounts. Since withdrawals are limited to six per month, savings accounts are best if you only need to access your money occasionally.

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