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Monday, August 16, 2010

Why Would I Want to Refinance a Paid-Off House: A Financial Fantasy

As an expansion of my last post, which struck many as mad.

Here is the fantasy. Let's just say I did a cash-out refinance* for about, ohhhh, 1/4 of the value of my paid-off house. Let's say, I just put it in an insured CD. At that point, I'd be paying about 2-3% on my loan, the difference between the CD and the super-low mortgage rate.

Let's say I kept rolling over the CDs as they matured. I have a feeling that rates are going to go up, at least some time in the next 30 years.

What is the origin of this fantasy? My parents got a 5% mortgage in the early 60s. Their Principle and Interest payments were minimal. In the 70s--when I was in grad school and had NO MONEY--interest rates went through the roof. My parents and many others were able to invest in newly-available bank money market accounts that were paying 20%. Even Treasury Bonds--risk-free then as now--were paying in the teens.

Still thinking about it, though I'm probably toooooo lazy to go through the process.

Does my financial fantasy still seem mad?

*Cash Out Refinance is when your mortgage includes CASH. My friends in the biz were urging such a refi during the housing bubble--for college savings, for kitchen remodels, and the like. If you've kept up with the news, you will see many stories of families that ended up owing $500,000 on a house they originally paid $100,000 for. The other $400,000 (based on the house's appreciation) went to vacations, tuition, credit card debt, Viking stoves, major remodels, SUVs, and Coach bags.

6 comments:

Duchesse said...

It all comes down to your appetite for risk! And you will not see money market accounts paying 20% in your remaining lifetime, and if we got that back we would be in a massively inflationary world. Have a nice restorative G&T till this passes.

nicoleandmaggie said...

What Duchesse said. I wouldn't do it unless it was just play money and I had a big amount in other safer investments. Maybe if I had too much money in real estate and not enough in other investments.

Frugal Scholar said...

Ok, Duchesse and nicole/maggie--I will refrain. But I still think that when I look back, I will wish I had done it.

Duchesse said...

I wouldn't want to be responsible for *you* refraining- it's your party. What does Mr FS think?

Frugal Scholar said...

@Duchesse--Don't worry. I was kidding...sort of. Plus Nicole is a genuine economist.

Budgeting in the Fun Stuff said...

I wouldn't do it just because I hate managing debt - call it lazy. Overall, the idea isn't nuts, just a little risky.