Is it a good strategy to +cash out refi every six months?
"When you refinance, there is cost (guess: around $2000-$3000) to cover lawyers, paperwork, surveys, deed insurance, etc. etc. etc. Someone has to pay that cost, and in the end it will be you. Even if you get a ""no points no cost"" loan, the cost is going to be hidden in the interest rate. That's the way transactions with knowledgeable companies works: they do business because they benefit (profit) from it. The expectation is that what they need is different from what you need, so that each of you benefits. But, when it's a primarily cash transaction, you can't both end up with more money. So, unless value will be created somewhere else from the process (and don't include the +cash, because that ends up tacked onto the principle), this seems like paying for financial entertainment, and there are better ways to do that."
"Pete and Noah addressed the math, showing how this is, in effect, converting a 30yr to a ~23yr mortgage, at a cost, plus payment about 8% higher (1 extra payment per year). No magic there. The real issue, as I see it, is whether this is the best use of the money. Keep in mind, once you pay extra principal, which in effect is exactly what this is, it's not easy to get it back. As long as you have any mortgage at all, you have the need for liquidity, enough to pay your mortgage, tax, utilities, etc, if you find yourself between jobs or to get through any short term crisis.  I've seen people choose the ""sure thing"" prepayment VS the ""risky"" 401(k) deposit. Ignoring a match is passing up a 50% or 100% return in most cases. Too good to pass up.  2 points to add - I avoided the further tangent of the tax benefit of IRA/401(k) deposits. It's too long a discussion, today's rate for the money saved, vs the rate on withdrawal. Worth considering, but not part of my answer. The other discussion I avoid is Nicholas' thoughts on the long term market return of 10% vs today's ~4% mortgage rate. This has been debated elsewhere and morphs into a ""pre-pay vs invest"" question." $33K, $227 payment is 7.33%. But is that right? You're also stretching out the remaining loan back to 30 years.  Now, if the bank just let you do the stretch, you'd owe $95K / 4.75% / 360 mo / PMT = $495.56 - this would be a neutral move, same rate. You now have: $128K / 5.625% / 360 / PMT = $737 so to my thinking, the delta is: $33K / X rate / 360 / PMT = $241.44 and the rate is 7.97% If you have enough equity to refi, you have enough to take that in a HELOC, and pay it off aggressively, why give up the great rate? The $227/mo you will pay the HELOC off in 22 years even at 6%. My HELOC is 2.5%. I'd use any raise or bonus to hack away at it.  I tried to spell out my thought process on the math. If any savvy reader (you all are, I know) wants to look at this and offer a better method, I'm open minded. There's a fallacy that comes with refinancing, certainly money appears in the payment stream as a result of extending the term. Somewhere that needs to be accounted for, else a higher rate at a longer term appears favorable, so my approach is to normalize the numbers one way or another. Here, producing that first step of calculating the payment on the extended term (an interim step that's a mental process only, that loan is hypothetical).  Comments welcome. There's really no general rule of thumb. There are a lot of factors that go into that decision.   It highly depends on the type of business, your financials and business strategy.   It's a double edged sword because retained earnings lose the potential to provide a higher return. While being cash poor can easily kill a company.  It sounds like you're experiencing significant growth. If there is high market potential and expansion prospects, a safe bet is to keep about 3 months of operating costs accessible while leveraging a bank loan to fund the growth.  That's the best answer I can provide without having any information. I'll preface this with saying that I'm not a finance or real estate professional, this is just how I understand the situation and what I'm doing:  We just got a 30year/FHA mortgage, there's no prepayment penalty, and no fees associated with paying it biweekly. In fact (Wells Fargo), while the payments get withdrawn biweekly, they don't actually post to the mortgage until there's enough for a full payment.  So essentially here are the benefits I'm realizing: I agree with the others that pulling the money out of your 401(k) is not the best idea due to the taxes and penalties.  But I also think that a 401(k) loan is not a good option either.  Somehow life happens, and the time when you can least afford to repay the loan (just after losing your job) will be the time when you have to repay the loan or pay the taxes and penalties.  There's just too much risk there.  You also lose the compounding gains you'd get from the investment, and it's likely not worth sacrificing your future retirement for this. It's probably worth finding out how close you are to having your house appraise out for a successful re-fi.  Without that information, you're just guessing.  Depending on how close you are, you pile up as much cash as you can over the next few months to try to pay down the mortgage enough to qualify for the re-fi.  As you're doing this, if home values start coming up in your area, you'll have that going for you as well.  It might even be worth suspending your 401(k) contributions for a short while to give you more cash to put towards the re-fi goal. Nope, don't do it.  Basic math shows this...as you pay down your HELOC, you will pay less and less interest, eventually you will have it paid off.  Look at what your RRSP will be worth even using a low rate of return over the next 20 or 30 years.  It will likely show that it would really cost you a LOT more if you cashed in. "You are suggesting that a 1% return per month is huge. There are those who suggest that one should assume (a rule of thumb here) that you should assume expenses of half the rent. 6% per year in this case. With a mortgage cost of 4.5% on a rental, you have a forecast profit of 1.5%/yr. that's $4500 on a $300K house. If you buy 20 of these, you'll have a decent income, and a frequently ringing phone. There's no free lunch, rental property can be a full time business. And very lucrative, but it's rarely a slam dunk.  In response to OP's comment - First, while I do claim to know finance fairly well, I don't consider myself at 'expert' level when it comes to real estate.  In the US, the ratio varies quite a bit from area to area. The 1% (rent) you observe may turn out to be great. Actual repair costs low, long term tenants, rising home prices, etc. Improve the 1.5%/yr to 2% on the 20% down, and you have a 10% return, ignoring appreciation and principal paydown. And this example of leverage is how investors seem to get such high returns. The flip side is bad luck with tenants. An eviction can mean no rent for a few months, and damage that needs fixing. A house has a number of long term replacement costs that good numbers often ignore. Roof, exterior painting, all appliances, heat, AC, etc. That's how that ""50% of rent to costs"" rule comes into play." "Your question isn't great, but I will attempt to answer this piece as it seems really the root of your personal finance question: I want to convince my wife to make this move because it will save us   at least 800 month, but she fails to see how buying a second home is   financially sound because we have to lose our savings and we have to   pay interest on our second home. And... Her logic is it will take almost 5 years to get back our down payment   and we have to pay interest as well. So how can this move help our   family financially in the long run? ... Is she right? She is mostly wrong. First, consider that there is no ""ROI"" really on your down payment. Assuming you are paying what your home would sell for the next day, then your ""RIO"" is already yours (minus realtor fees). She is talking about cash on hand, not ROI. I will use an example without taking into account risk of home markets going down or other risks to ownership. Example: Let's say you pay $2800 a month in mortgage interest+principle at 5.5% apr and $200 a month in taxes+insurance on a $360k loan ($400k house). In this example let's say the same house if you were to rent it is $3800 a month. Understand the Opportunity Cost of renting (the marginal amount it costs you to NOT buy). So far, your opportunity cost is $800 a month. The principle of your house will be increasing with each payment. In our example, it's about $400 for the first payment, and will increase with each payment made while decreasing the interest payment (Suggest you look at an amortization table for your specific mortgage example). So, you're real number is now $1200 a month opportunity cost. Consider also the fact that the $400 a month is sitting in a savings account of sorts. While most savings accounts give you less than 1% in returns and then charge taxes on that gain, your home may (or may not be) much higher than that and won't charge you taxes on the gains when you sell it (If you live in it for a period of time as defined by the IRS.) Let's assume a conservative long term appreciation rate of 3%. That's $12k a year on a $400k house. So, now you're at $2200 a month opportunity cost. In this example I didn't touch on your tax savings of ownership. I also didn't touch on the maintenance cost of ownership or the maintenance cost of renting (your deposit + other fees) which all should be considered. You may have other costs involved in renting. For instance: The cost of not being able to fully utilize your rental as your own house. This may be an even simpler and more convincing way to explain it: On the $2800 mortgage example, you will be paying around $19k in interest and $2400 on taxes, insurance = $23k per year (number could be way different in your example). That is basically throw away money you're never getting back. On the rental, 100% of your rent at $3800 a month is throw away money you're never getting back. That's $45,600 a year." First problem I see is you'd be getting that rent per month, so you get 12% a year before taxes and related expenses. Loans will allow you to leverage your capital, so you can cover the mortgage payments with rent and still have money left over. Do this a couple times, and you can make serious money.   Obviously, I don't know the specifics but this is just my viewpoint of RE in general. There could potentially be many downfalls. I know this is heresy but if you have funds for significantly more   than 6 months of expenses (let's say 12 months), how risky would it be   to put it all into stock index funds? Quite risky as if you do need to dip into it, how fast could you get the cash? Also, do you realize the tax implications when you do sell the shares should you have an emergency? In the worst-case scenario, let's say you have a financial emergency   at the same time the stock market crashes and loses half its value.   You could still liquidate the rest and have sufficient funds for 6   months. Am I underestimating the risks of this strategy? That's not worst case scenario though. Worst case scenario would be another 9/11 where the markets are closed for nearly a week and you need the money but can't get the funds converted to cash in the bank that you can use. This is in addition to the potential wait for a settlement in the case of using ETFs if you choose to go that way. In the case of money market funds, CDs and other near cash equivalents these can be accessed relatively easily which is part of the point. A staggered approach where some cash is kept in house, some in accounts that can easily accessed and some in other investments may make sense though the breakdown would differ depending on how much risk people are willing to take. If it truly is an emergency fund then the odds of needing it should be   very slim, so why live with near zero return on that money? Something to consider is what is called an emergency here? For some people a sudden $1,000 bill to fix their car that just broke down is an emergency. For others, there could be emergency trips to visit family that may have gotten into accidents or gotten a diagnosis that they may pass away soon. Consider what do you want to call an emergency here as chances are you may not be considering all that people would think is an emergency. There is the question of what other sources of money do you have to cover should issues arise. Your wealth will go up if your effective rate after taxes is less than the inflation rate.  That is, if your interest rate is R and marginal tax rate is T, then you need R*(1-T) to be less than inflation to make a loan worth it.  Lately inflation has been bouncing around between 1% and 1.8%.  Let's assume a 25% tax rate.  Is your interest rate lower than between 1.3% and 2.4%?  If not, don't take out a loan. Another thing to consider: when you take out a loan you have to do a ton of extra stuff to make the lender happy (inspections, appraisals, origination charges, etc.).  These really add up and are part of the closing costs as well as the time/trouble of buying a house.  I recently bought my house using 100% cash.  It was 2 weeks between when I agreed to a price to when the deal was sealed and my realtor said I probably saved about $10,000 in closing costs.  I think she was exaggerating, but it was a lot of time and money I saved.  My final closing costs were only a few hundred, not thousands, of dollars. TL;DR: Loans are for suckers. Avoid if possible. I'll be happy to edit when you provide answers to the question I posed in the comments.  Given the choice (and I assume there is no other) I'd take a loan from the 401(k) vs a withdrawal.  You withdraw $40K. I'll assume 25% bracket as you're planning at least a $200K house. Hopefully, your taxable income is above $38K, the 25% line for singles. The tax and penalty is 35% total, federal. You net $26K. And you have $40K less in the retirement account. In 40 years, at 10% average growth, that's $1.8M you won't have in your 401(k). And as littleadv stated, no deposits for 6 months, meaning no matching. There's a few more thousand you'll lose.  You borrow $20K. Your 401(k) will see a return on the $20k that's better than the short bond account, 4-5% vs less than 1%. You are short $6K, but in return have paid no tax, no penalty, etc. I respect those who are strongly anti-loan, but even they would agree, this is the far lesser of 2 evils.   The above is pretty generic, there are better choices. But your CPA friend's advice is nearly as bad as it gets. By the way, the tax you'll save once you have the mortgage has nothing to do with that 10% penalty. Say you bought the house with cash (as many would be happy to do). You'd pay the penalty for the 401(k) withdrawal, but have no mortgage deduction. If you had the 20%, you still have a loan and the deduction, but no penalty for taking his bad advice.  My advice is to take that refund and use it to pay the loan faster. Hope you figure it out.  There wouldn't be a different RFR / discount rate because you're assuming a return on parked cash - that's what it's for.  Since both situations would theoretically happen simultaneously you use the same rate unless you would do something different with cash in each instance. Hmm, if your financially savvy enough to have saved up half a million dollars, I'd think you would be savvy enough to spend it wisely. :-) I think I'd spend the cash before running down stocks and bonds, as cash almost surely has a lower rate of return.  I'd look into what rate of return you're getting on the rental property versus what you're getting from other investments. If the rental property has a lower return, I'd sell that before selling off stocks. (I own a rental property on which I am losing money every month. I'm still paying a mortgage on it, but even without that, the ROI would be about 4% under current market conditions.) Besides that, your plan looks good to me. Might need to add, 8. Beg on the streets, and 9. Burglary. "Yes, a HELOC is great for that. I just had my roof done last month (~$15K, ""ugh"") and pretty much every major contractor in my area had a 0% same-as-cash for at least 12 months. So that helps - any balance that I don't bank by 11/15/2015 will be on the HELOC."