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Refinance Your Home – Part 4… Make Some Money!

This time around, we’re going to cover my favorite reason to refiance your home… to make some freakin’ money!

In this case, we’re not actually creating a new mortgage, we’re just pulling some money out of the equity you have built up on your mortgage over time.  Why would we want to do that?  Because your home mortgage is going to be some of the cheapest money you will ever have access to.

But wait, isn’t that risky?  What are you supposed to do with money that you’ve borrowed at a rate of 3.5-5%?

Well, beat that rate of return, for a start.   But don’t worry… I’m not suggesting putting that cash into stocks or anything.  That implies a great degree of risk.  Last thing we want is a 20-40% chance that some or all of the money you pull out of your mortgage is going to go up in smoke.

So what do we do with the cash?  If you’ve been reading this blog for any period of time, you know that we’re big fans of “Fed Watching”.  The American Federal Reserve is the world’s largest bank, and they’re charged with making sure that the American (and to a smaller extent the world) economy doesn’t accidently jump off the top of a skyscraper.  Sometimes, that means they end up bailing out asset classes like US bonds, or their current kink, mortgage backed securites.

As long as the world’s largest bank is snapping up mortgage backed securities, they are pushing up demand as well… which effectively places a backstop on the price movement of these securities.   There would need to be a hell of a housing crash before these securities start going down in value.

The best part?  The interest rate you collect can often be over 7%.   Pay 3.5% interest to your bank, collect 7% from other people’s home mortgages owned through securities backstopped by the world’s largest bank?   Sounds sexy, doesn’t it?

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