Refinancing Your Rainy Day Fund

With all the news about underwater mortgages and the depressed housing market, it’s easy to forget that most homeowners do have equity. With mortgage rates at record lows, would it make sense to take money out of your home – even if you don’t need to – for an investment or a rainy day fund, perhaps?

The math can make this move look good, but the risks are sobering.

In the 1990s, some experts argued that growing home values provided a perfect source of money for other types of investments, especially stocks. The idea was simple: if you could borrow against your home at a 7 or 8% mortgage rate and invest the money for a 12% return on the stock market, you’d make an easy 4 or 5%.

This idea doesn’t get much circulation these days, probably because the stocks have suffered two crashes and produced a long run of disappointing years since 2000. But many American corporations are using a similar strategy, borrowing at today’s low interest rates and either investing the money or setting it aside so they won’t have to borrow in the future, when rates are likely to be higher.

With a home, equity is the difference between the property’s value and the outstanding debt. If your home was worth $400,000 and you owed $150,000, you’d have $250,000 in equity. These days most lenders limit debt to 80% of the property’s value, so you could carry up to $320,000 in debt on the home. It shouldn’t be too hard to borrow $100,000 more than you currently owe.