Cash Out to Diversify (Amongst Other Things)

[Todd S.]

So I'm sitting on maybe $300-$400k of equity at the moment in my primary residence that I purchased in 2012.  Originally put 20% down and appreciation has been quite absurd since.

If I refinance and pull $250k cash out I can get the same interest rate I currently have (more or less) on a 30-year fixed or a slightly lower rate if I go with a hybrid ARM such as 7/1, etc. I currently have a 30-year fixed at 3.75%.

I don't have a specific need for the cash right now...which is my dilemma, but I see the value in "diversifying" and getting a decent chunk of my money out of my one "investment," my primary residence. Maybe this thinking is wrong, I don't know.

Assuming I cash out, I'll still have 20% equity in the property (80% LTV on the new loan), which to me is plenty of exposure and cushion. I'm not retiring soon nor am I planning to stay in this property...I'm already outgrowing it. I could, however, rent it seemingly for the long term and still come out ahead each month with the higher loan amount post-cash out, so affordability wouldn't be an issue.

No plans to buy real estate at the moment because I think it's overheated in most markets, especially those I'm familiar with, but if the money did land in my account today, I'd probably invest in a conservative mix of mutual funds, stocks, bonds, etc. with the hopes of at least beating my mortgage rate.  You'd think a 4% return would be attainable, right?

Another benefit is that I can refi now while it's NOT a rental and get a lower rate (and more cash out), and I'll get a larger interest write-off with the larger loan amount, possibly offset by investment gains elsewhere.

Just curious what others think of this, or what you would do in a similar situation. I know most people would prefer to have a plan for the money before paying to cash out, but I also don't like sitting on this much equity, even if I don't have a specific plan.  And I can't really sell at the moment because I don't have anywhere else to go.

For the record, I don't want a HELOC because that's not guaranteed money if the bank decides to pull/reduce the line.

Lastly, is there any truth (benefit) to having a higher mortgage payment on a rental and thus less profit to report, which equates to better tax treatment, or is it that just nonsense?

Thanks for your input!