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Author: JanetW Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Refinancing Query Date: 1/8/1998 12:04 PM
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With mortgage rates as low as they are, my husband and I are considering refinancing and pulling out some cash to take care of some much needed home improvements.

My husband has proposed that we take out more than is necessary for the home improvements and invest this cash for our retirement and future well-being. It seems to make sense. We can deduct the interest, this equity we're pulling out can be growing at a rate probably not possible by leaving it in the house.

The obvious down side is that we're increasing our overall debt. We do plan to stay in our house for many years and our equity is close to 50% of the value of the property.

Does this plan make any sense or are we being incredibly short-sighted?

Thanks for the help, Janet
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Author: RecoveringFool Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1125 of 76418
Subject: Re: Refinancing Query Date: 1/8/1998 12:24 PM
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While theoretically this would seem to work, are you sure you will come out ahead ? Suppose you have $10,000 of equity to invest, what interest rate are you paying on the equity loan ? How much are you making on the investment ? How much risk are you taking ?

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Author: jwilson Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1126 of 76418
Subject: Re: Refinancing Query Date: 1/8/1998 3:26 PM
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You may want to take a look at the option of using the loan proceeds to make some investments. Usually the IRS requires an offset of earnings against interest when money is borrowed and invested. However, if there is a way of using money from some other source for the investments, even if borrowed money is used to buy or pay for that other source (such as a sale of something to parents, and later buy back).

Jim

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Author: jwilson Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1127 of 76418
Subject: Re: Refinancing Query Date: 1/8/1998 3:27 PM
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You may want to take a look at the option of using the loan proceeds to make some investments. Usually the IRS requires an offset of earnings against interest when money is borrowed and invested. However, if there is a way of using money from some other source for the investments, even if borrowed money is used to buy or pay for that other source (such as a sale of something to parents, and later buy back).

Jim

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Author: jwilson Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1128 of 76418
Subject: Re: Refinancing Query Date: 1/8/1998 3:28 PM
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You may want to take a look at the option of using the loan proceeds to make some investments. Usually the IRS requires an offset of earnings against interest when money is borrowed and invested. However, if there is a way of using money from some other source for the investments, even if borrowed money is used to buy or pay for that other source (such as a sale of something to parents, and later buy back).

Sorry to send this by E-Mail, but I am having trouble posting

Jim

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1129 of 76418
Subject: Re: Refinancing Query Date: 1/8/1998 6:01 PM
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Greetings, Janet, and welcome.

<<With mortgage rates as low as they are, my husband and I are considering refinancing and pulling out some cash to take care of some much needed home improvements.

My husband has proposed that we take out more than is necessary for the home improvements and invest this cash for our retirement and future well-being. It seems to make sense. We can deduct the interest, this equity we're pulling out can be growing at a rate probably not possible by leaving it in the house.

The obvious down side is that we're increasing our overall debt. We do plan to stay in our house for many years and our equity is close to 50% of the value of the property.

Does this plan make any sense or are we being incredibly short-sighted?>>

No, I don't believe you're being short-sighted. However, you do have to ask yourselves if the spread after taxes between your potential investment return and the debt is worth that debt and the added risk of the investment. The interest on the debt will be tax deductible while your return will be taxable (at some point, anyway). If the spread between the investment return and the loan appears in your mind worth the risks, go for it. Unless you live in a hot housing area of the country, the best your house will do in appreciation is around annual inflation. If the spread exceeds that, freeing up the money for investment is an attractive alternative. But if you don't like the extra debt, it isn't. Only you and your hubby can make those decisions after you've looked at all aspects of the situation.

Regards......Pixy

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Author: rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1157 of 76418
Subject: Re: Refinancing Query Date: 1/9/1998 12:16 PM
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<<...considering refinancing and pulling out some cash to take care of some much needed home improvements.
My husband has proposed that we take out more than is necessary for the home improvements and invest this cash for our retirement and future well-being. It seems to make sense.>>
Yes, from a financial viewpoint, IF AND ONLY IF you invest this extra money and don't spend it. ("Investments" in a powerboat or ski-trip don't count as investments!)

<<The obvious down side is that we're increasing our overall debt.>>
No, you're not. Your mortgage debt is higher, but your assets (in stocks) are also higher--by the same amount.
As long as the debt load isn't too high, and you can afford the payments, the stock growth of (average) 10.5% gains you more than the 7% interest you are paying out.

We did this exact same thing early last year. I figured that by investing this extra money, and adding to it the monthly difference between the 15 year and 30 year payment, that we will have enough stocks assets to completely pay off the remaining mortgage balance in about 9-12 years. BUT, you can't spend the money. you MUST invest it.

Regards,
Ray

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1166 of 76418
Subject: Re: Refinancing Query Date: 1/9/1998 2:10 PM
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Ray,

<<.We did this exact same thing early last year. I figured that by investing this extra money, and adding to it the monthly difference between the 15 year and 30 year payment, that we will have enough stocks assets to completely pay off the remaining mortgage balance in about 9-12 years. BUT, you can't spend the money. you MUST invest it.>>

Precisely. That's the hardest part for many to understand from my experience. Same principal applies when they wish to forego a 401k contribution for a better return elsewhere. It's meaningless without the follow-through.

Regards....Pixy


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Author: JeanDavid Big funky green star, 20000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1320 of 76418
Subject: Re: Refinancing Query Date: 1/15/1998 3:00 PM
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<My husband has proposed that we take out more than is necessary for the home improvements and invest this cash for our retirement and future well-being. It seems to make sense. We can deduct the interest, this equity we're pulling out can be growing at a rate probably not possible by leaving it in the house.>

Aside from the investment risk, that I assume someone better qualified than I will address, bear in mind that depending on what you choose to invest in, the interest may not be deductable. Interest is not deductable if the principle is used to purchase tax-exempt securities, for example. I do not know if contributing to an IRA counts as tax-exempt, but tax-exempt municipal bonds certainly do.

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