Chances are you’ve built up a lot of equity in your home over the past few years, thanks to rising home values and the fact that you’ve been paying down your mortgage balance. You can tap into this equity in the form of a cash-out mortgage refinance. The cash you take out at closing can be used for virtually anything you want – even investing in the stock market.
The appeal is clear: The basket of stocks that make up the S&P 500 rose nearly 27 percent in 2021 (the average return on that index has been about 10 percent a year over long periods), while mortgage rates averaged 3.28 percent in Bankrate’s latest survey. The idea is that savvy homeowners can tap their home equity and reap investment gains that outpace their mortgage interest — and therefore grow wealthier over time.
But this may not be the best use of your cash-out equity. Making Wall Street investments can be risky, and it can take a while to recoup the costs involved with refinancing. Weigh the advantages and disadvantages carefully and determine if this tactic is right for you and your needs.
Are you allowed to use a cash-out refinance to invest in stocks?
The good news is that you can use the cash you take out at closing during a refi for just about anything you want, from funding a home improvement project or paying down outstanding high-interest debt to covering the cost of a wedding or college tuition.
“You are allowed to use your cash-out refinance money for whatever you like. Typically, people will use the cash for home repairs and improvements, but you don’t have to,” says Nate Tsang, founder and CEO of WallStreetZen. “Just because the money is coming from your home’s value doesn’t mean it needs to stay there.”
There are also no restrictions on doing a cash-out mortgage refinance, if you’ve built up significant equity in your home, and then turn around and invest those funds in the stock market, according to Daniel Milan, managing partner at Cornerstone Financial Services in Southfield, Michigan.
“You merely complete a cash-out refinance with the lender of your choosing and then, after receiving the cash, you can transfer it to a brokerage account and invest accordingly as you so desire,” Milan says.
The pros of this strategy
As with any financial endeavor, there are pluses and minuses to ponder. Consider the possible benefits carefully.
“First, the advantages of funding stock market investing via a cash-out refinance are multiple. You’ll likely lock-in the funding at a lower rate of interest, since interest rates on secured mortgage loans are relatively lower …….