Cash out refi on my primary?

[Chris Webb]

I have 130k in equity in my primary residence at 4%. I believe if I do a cash out refi I could get a slightly lower rate and pull out 65k. I am confident I can get that cash to return at at least 8% and probably higher. I would not have a problem covering the higher mortgage payment. To me this seems like a no brainier but my wife is a little more skeptical. Is this a good idea? Is there anything else I should consider on this?

[Chris Mason]

Hi @Chris Webb,

No, not quite. 

Let's suppose you fix up a kitchen (or some other thing).

Let's suppose that will allow you to command $175/month more in rent, and let's suppose you have a vacant month each year, normally.

Let's further suppose that it will cost $10,000. "OMG $10,000!!!" - Right, scary.

Shall we do math?

$175*11/$10,000 = 19.25% ROI.

That kicks the crap out of any mortgage interest rate, or Wall Street.

But that's not guaranteed, it must be noted. I just made the $175/month and $10k one-time numbers up!

The real question is about the condition of the current kitchen (or other thing you are replacing/improving). If it's only 4 years old, $175/month extra for a replacement is highly unlikely. If it's a 30 year old kitchen that hasn't really seen any updates within the last couple decades? $175/month isn't crazy at all.

That is how you evaluate the notion of fixing the current place up.

The opportunity cost of taking that $10k and fixing the current place up, is that you can't use it for a down payment on the new place. So I've complicated your decision a bit here on what you should use the cash out net proceeds for.... :P