It may sound crazy but it can work for some people. If you have lots of equity in your home you may still be able to obtain a cash out morgage refinance at current low rates, despite the credit crisis. If you have a $200k mortgage at 7% or more, refinancing to around 5% will save you over $3000 a year, the caveat being you need to take refinancing costs into account. If you shop around, you may actually find a no-cost refinancing offer although it’s not likely to be at the very lowest rate.
There are two ways your retirement fund can benefit from such a mortage refinance; firstly with the lump sum from the cash out, and secondly if you put any difference in your mortgage payment into the fund, such as the $3000 a year mentioned earlier.
The combination of low interest rates and current lower valuations on equities may make it attractive to invest some or all the proceeds of a cash out refinance in the stock market. But this will only work if you have sizeable equity and make sensible investments, such as a broad portfolio of high margin of safety stocks. As Buffett would say, we need to be greedy when everyone is fearful. At times like this value investors just want to throw everything into the market. Judging by some of the emails I’ve received from regulars, many of them are doing so, and being well rewarded.
Even without a cash out refinance, just refinancing to the lower rate now and investing the difference will really boost your retirement fund 10 or 20 years from now. The odds of not having enough to retire on are probably a lot higher than the odds of losing everything in a market crash providing you spread your risk astutely.
Whatever you do, remember that a cash out refinance is taking on more debt. If you already have other debt, especially higher interest debt, it would be advisable to pay that off first, and ensure you have an adequate emergency fund before investing any savings in your mortgage payment and tying them up for a long term goal like retirement.
If you only have a little equity, it’s probably not a good idea to do this. Rates on 30 year mortgages have risen since April and it is unlikely the Fed can or will do anything further to lower them. Consequently, the housing slump may continue longer and home prices may have further to fall.
