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The good news is that you can use the cash you take out at closing during a refi for just about anything you want, from funding a home improvement project or paying down outstanding high-interest debt to covering the cost of a wedding or college tuition. “You are allowed to use your cash-out refinance money for whatever you like. Typically, people will use the cash for home repairs and improvements, but you don’t have to,” says Nate Tsang, founder and CEO of WallStreetZen. “Just because the money is coming from your home’s value doesn’t mean it needs to stay there.” There are also no restrictions on doing a “You merely complete a cash-out refinance with the lender of your choosing and then, after receiving the cash, you can transfer it to a brokerage account and invest accordingly as you so desire,” Milan says. The pros of this strategy
As with any financial endeavor, there are pluses and minuses to ponder. Consider the possible benefits carefully. “First, the advantages of funding stock market investing via a cash-out refinance are multiple. You’ll likely lock-in the funding at a lower rate of interest, since interest rates on secured mortgage loans are relatively lower than for any unsecured loan,” says Lyle Solomon, a financial expert and principal attorney with Oak View Law Group in Rocklin, California. “Also, the money you get from a cash-out refi is not taxable, since it’s not considered as income.” Additionally, with a cash-out refi, you can get access to your money within weeks and then begin turning that into long-term profit through investing, if your returns are favorable. “And the returns you’ll see can be greater than the value you’d gain from your home’s appreciation if you had not pursued a cash-out refinance,” Tsang adds. The cons of this strategy
The biggest downside to using liquid funds from a cash-out mortgage refinance to invest in the stock market is that the stocks, funds or other investment vehicles you choose can decrease in value. “There is no guarantee of getting a positive return when you invest in the stock market. You can lose money and you’ll still have to repay the mortgage loan, too,” cautions Solomon. Also, closing costs can average 2 percent to 5 percent of your amount borrowed, which can add up to thousands. This can be the equivalent of paying a 2 percent to 5 percent load on a mutual fund, which would be unacceptable to many investors today. In addition, completing a refinance can take up to two months. “While devoting this time, the stock market may take a downward turn and not look as attractive anymore,” Solomon says. What’s more, you’ll increase your risk of foreclosure when taking out more debt on your home. “This debt has to be paid off with your existing cash flow, and if that cash flow goes away – say by losing your job – you stand a greater chance of losing your property,” says R.J. Weiss, a Geneva, Illinois-based certified financial planner and founder of the personal-finance site The Ways to Wealth. “Combine this scenario with a market decline and you could end up losing your home and seeing your portfolio drop by 30 percent or more.” As if those weren’t enough good reasons to avoid this strategy, consider that stocks are currently at record high valuations. “If you were to invest your entire cash-out refinance proceeds in the stock market, there is a high likelihood that you could see a major decline in your investment ,” Weiss says. Nick Bormann, an investment advisor representative and managing member at Bormann Wealth Management seconds those sentiments. “For this strategy to work, your return from the stock market would have to be higher than the additional interest you will pay as a result of pulling out your home equity and possibly extending your mortgage, plus the closing costs involved,” says Bormann. Are you a good candidate for using a cash-out refi to invest in stocks
Solomon says you should fit several criteria to be a worthy candidate for investing in the stock market, including: Your debt-to-income ratio should be below 40 percent. Your credit score should be 700 or higher to get a lower interest rate. After cashing out, your home should retain at least 20 percent equity. You earn well, have a reasonable budget, and save a decent amount every month. You have the risk tolerance to handle the ups and downs of the stock market. You are seeking a long-term investment. You are saving appropriately for retirement. “Additionally, you must be able to afford the potential increase in your monthly mortgage payments,” adds Milan. “Those who cannot should probably not pursue a cash-out refinance to invest in stocks.” Alternative strategies
Instead of putting your home at risk in the event you default on your loan, a better option might be to make stock market investments using your savings. “By doing so, you won’t put a burden on your household budget to repay the mortgage loan, and you will lower your stress level,” says Solomon. An alternative approach is to pursue a cash-out refi but use the cash at closing to pay off high-interest debt. “Then, using the excess cash flow gained from the lower interest rates, maximize your tax-advantaged investment accounts while into the market,” Weiss says. Or, consider refinancing at a lower rate but without cashing out any equity. “Then, invest the monthly difference between your old payment and new payment into an investment account,” Milan says. Regardless of how you plan to pay for stock market investments, aim first to save for retirement, and always make sure you have an emergency fund set aside, Solomon advises. What to consider before using your cash-out refinance to invest in stocks
If you are determined to put your money into the stock market, it’s essential to choose wise investments based on several criteria, including your age, projected retirement date, risk tolerance and other factors. “While investing in stocks, mutual funds, or any other chosen investments, make sure you build a sound investment portfolio,” says Solomon, who suggests working with a skilled investment advisor. “I recommend selecting . By doing so, you can get high returns and reduce the risk of losing your entire invested amount.” Learn more
SHARE: Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment. Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal. Related Articles