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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.


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.