Cash out refi and high yield savings

[Matt F.]

Hi all, been thinking about this and cant tell if im missing something.  If I can refinance at 6.5% and then put that money right into a savings account that gets 4.1%, assuming I keep the money in there, rates stay the same, and closing costs are not significant, does that make my bottom line equal a 2.4% mortgage rate?

[Robin Simon]

Quote from @Don Konipol:

Quote from @Matt F.:

Hi all, been thinking about this and cant tell if im missing something.  If I can refinance at 6.5% and then put that money right into a savings account that gets 4.1%, assuming I keep the money in there, rates stay the same, and closing costs are not significant, does that make my bottom line equal a 2.4% mortgage rate?

It’s the other way around.  The move you are suggesting is costing you 2.4% and you’re gaining nothing.  

 Here’s an example.  Your current mortgage balance is $100k at 4%, so you’re currently paying $4,000 in interest annually.

You refi at 6% for $200,000.  Your interest payout is $12,000 annually.  You receive $100,000 cash at closing after paying off the existing $100k mortgage.  You place the $100k in a savings account paying 4%.  So you earn $4k annual interest.  

$12,000 interest outgo minus $4000 interest income equals paying net $8k interest.  Your net position hasn’t changed, and you doubled the amount of interest you’re paying from $4k to $8 K.  As a lender I love you. 

 Agree with this, you are essentially borrowing more debt at 6.5% to earn 4.1% - you would be losing money.  The only reason to do a cash-out refi is if you believe you have opportunity to earn more than the 6.5% yield with the capital taken out