cash-out-refi to cover loan or Sell stocks

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cash-out-refi to cover loan or Sell stocks

Daniel Suarez
Fairfax, VA · Member since 2017 · 183 posts · 58 votes

Hey All, 

I purchased a home about a year ago for around $200k, I put close to $90k in fixes and did a historical appraisal that came up to $410k. I borrowed $70k from family and was planning to return it after the refinance, but the bank refinance came back at $330k which is much lower than what I expected. So my options are these. 


Cash-out-refi the property. That would give me about $54k to pay, the loan and I would sell stocks to cover the difference. The problem is that my original loan is at 3.99% and the new one would be at 6.25% (they only allow me to get 60%) So my monthly mortgage would go from $1207 to $1715, that's almost a $500 loss in cashflow. 

My other option would be to not refinance and instead sell stocks. I would sell about half of united healthcare that in reality didn't do bad, so I wouldn't be losing there and losing stocks the other half for tax purposes. 

I know this can be a very "I can't decide for you situation" but I would love to hear what would you do in my position. A couple of notes about myself. I'm a high-income W2 and I expect this house to value for a lot higher in the next couple of years. Thanks in advance. 

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Elle S.
Member since 2021 · 7 posts · 5 votes
4y

I wouldn't cash out refi. Is there another way to pay back your family member? Will they go for letting you pay it back at a certain interest rate like an installment loan or do they want their entire $70k back?

Instead of selling the stocks, have you considered a Loan Management Account (LMA)? You can take out a low interest loan against your brokerage account. These loans have pretty favorable terms since the stocks in your account are the collateral if you default so reach out to your brokerage. Alternatively, you can take out also take a loan against your 401K as well via your 401k servicer. Both of these options allow you to keep your securities invested in the market, charge a much lower interest rate than HELOCs/personal loans/today's rates, and are only taken out of your investment accounts if you default on the loan. Sounds like the better middle ground. 

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  • Scott TrenchPro Member
    Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
    4y

    There's no "right" answer to your question. It's all based on what you believe. 

    I believe that over a 30 year period, that stock market returns are likely to be 7-10% per year (CAGR). That is greater than 6.25% per year. But not by a lot. Paying off debt at 6.25% (which you are doing if you sell stocks) is guaranteed. The 7-10% anticipated return of stocks is not. 

    With my belief system, I think you are right in this "sweet spot" of having a really hard choice that comes down to betting on long-term outcomes. 

    Note that you will also have to pay tax on the stocks you sell this year. Paying tax on gains (as long as they are long-term gains) is a fact of life both today and at a future point you'd sell them, so it's a moot point. But, if you for some reason have short-term gains (or losses) that could sway the math in your situation and make it an easier or harder choice (harder if you have recent gains - unlikely, and easier if you have recent losses - as you will have a near-term tax advantage). 

    Personally, I'd have a slight lean towards refinancing - I don't like to sell my stocks portfolio, as I think really long-term. An investment is never sold unless it's an intentional part of my plan. I pretend like I'm going to hold all investments I make forever.

    If you can, try to get a second mortgage, so you can keep the great rate on the first one. As a high income earner, you might also opt for short-term financing like a HELOC (or a second mortgage with an adjustable rate) or you might consider taking a personal loan against your stocks through your brokerage and just paying it off heads down with the cash flow you generate from your life over the next 6-12 months.

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  • Daniel Suarez
    OP
    Fairfax, VA · Member since 2017 · 183 posts · 58 votes
    4y

    Thanks so much Scott. I actually had an ELC against my stocks, but because the prices kept on dropping and min balance required, i had to close it. 

    While reading what you're saying, I realized a couple of things as well. The rate is 6.25%, but I would be paying $7k in closing costs, which is about 12 points of the loan I would be getting, and also that the rest of my original loan would be increasing by more than 2 points by doing this.

    I don't really like to sell stocks either so that is that. I definitely have to think harder on it. I could always replenish the stocks with the extra cashflow I get every month. 


    I have never done a HELOC or a second mortgage, I can definitely take that into consideration

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  • Elle S.
    Member since 2021 · 7 posts · 5 votes
    4y

    I wouldn't cash out refi. Is there another way to pay back your family member? Will they go for letting you pay it back at a certain interest rate like an installment loan or do they want their entire $70k back?

    Instead of selling the stocks, have you considered a Loan Management Account (LMA)? You can take out a low interest loan against your brokerage account. These loans have pretty favorable terms since the stocks in your account are the collateral if you default so reach out to your brokerage. Alternatively, you can take out also take a loan against your 401K as well via your 401k servicer. Both of these options allow you to keep your securities invested in the market, charge a much lower interest rate than HELOCs/personal loans/today's rates, and are only taken out of your investment accounts if you default on the loan. Sounds like the better middle ground. 

    3Reply
  • Serge Roux
    Investor · New York, NY · Member since 2015 · 12 posts · 8 votes
    4y

    I don’t know much about this cuz it’s something I recently heard on a BP podcast (I forget the episode) but they mentioned something about challenging appraisals. Not sure that’s an option but it could be something you research. If you can get the appraisal to come in higher you open up more financing. You’d still be stuck with the higher interest rate, however. 

    Good luck with you decision!

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