Refinance: Cash Out or No Cash Out

[Travis Barron]

Hello BP Members, I'd like to hear your opinion.

Currently my wife and I are looking to refinance underlying mortgage on our primary residence from a 30 yr fixed @ 4.5%, to a 5/1 ARM @ 3.375% based on received rate quotes, as we will be moving out of NYC within 5 Yrs. We have an opportunity, at least based on preliminary discussions w/ our mortgage broker, to pull out an additional $40k (approx.). I've done the analysis, comparing the cash out refinance vs. a lower monthly payment, and we would need to earn an avg annual return of 7% or more over the next five years on the invested cash out funds ($40k) for it to make sense from a purely dollars/net worth aspect.

Given present somewhat high valuation of equity markets, i consider moving the money into equities significant risk with minimal upside. however, investing additional funds in a single family rental and obtaining a mortgage, i estimate (somewhat conservatively) we could earn an avg annual return of 12%+, at a minimum. Albeit at a much higher risk level given the increased debt.

Btw, our present plan - without additional funds - is to buy one rental property by year's end, a second by end of next year. If we do the cash out option though, we would aim to buy by end of Oct or Nov this year, second property by Apr or May 2015, and a third by Dec 2015.

Current DTI ratio is 19%, and would remain 19% if take cash out option as monthly payment is virtually unchanged from current payment. From a risk management perspective, we have 9 months of living expenses in a savings account.

Which option would you choose? Thanks! 

[Garrett Poshusta]

You might also consider a slightly difference scenario where you don't take the cash out during your refinance but instead setup a HELOC against remaining available equity. While 3.375% is great. I just closed on HELOC with 3.99% with no setup/closing costs. In this way you wouldn't necessarily have to deploy the cash unless you found the deal you wanted.