Re-casting mortgage

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ashagru
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Joined: Sun Mar 29, 2015 11:51 pm

Re-casting mortgage

Post by ashagru » Sat Jul 07, 2018 10:36 am

Hi All: Recently, we purchased a house in a HCOL area. My monthly mortgage is ~6k. While we can afford this, I do want to reduce this to more manageable levels. Our mortgage interest rate is 3.875 on a 30-year fixed rate loan.

I have ~$250k additional funds that I did not use for the downpayment. My bank allows recasting, but after closing they told me that I have to wait for 90-days to recast. If I put additional $200k to paying down the loan, my monthly mortgage will come down by ~$850. My questions for the group:

1. What do you recommend is the best use of the $200k -- recast the loan or invest in stocks?
2. Since I have to wait for 90 days, I was thinking of putting the money into an Ally bank CD. Do you have any other recommendations?

Thanks.

jminv
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Re: Re-casting mortgage

Post by jminv » Sat Jul 07, 2018 10:52 am

How old/close to retirement are you? If you're young, I wouldn't be too excited about a return of 3.875% by putting more cash into the house.

I guess I might psychologically view it somewhat differently if the mortgage payment was a very high percentage of income. Is it?

A 3 month CD at Ally yields 0.75%. Looking around, I see other 3 month CDs that yield 2%.

Edit: The 2% CD is at Third Federal Savings and Loans.
Last edited by jminv on Sat Jul 07, 2018 10:57 am, edited 1 time in total.

ashagru
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Joined: Sun Mar 29, 2015 11:51 pm

Re: Re-casting mortgage

Post by ashagru » Sat Jul 07, 2018 10:55 am

Hi: Good questions.

I am 40 and so 20-25 more years for work. Between my wife and I, monthly take home is $16k. Monthly expenses are ~14k (mortgage, 2 kids' daycare, food, cars, etc.). Savings are mainly 401ks/529 and money invested before. Mentally, reducing the mortgage seems like a good way of increasing savings.

Let me know what the group recommends. Thanks.

jminv
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Re: Re-casting mortgage

Post by jminv » Sat Jul 07, 2018 11:07 am

ashagru wrote:
Sat Jul 07, 2018 10:55 am
Hi: Good questions.

I am 40 and so 20-25 more years for work. Between my wife and I, monthly take home is $16k. Monthly expenses are ~14k (mortgage, 2 kids' daycare, food, cars, etc.). Savings are mainly 401ks/529 and money invested before. Mentally, reducing the mortgage seems like a good way of increasing savings.

Let me know what the group recommends. Thanks.
I would probably try to lower the monthly mortgage payment given your mortgage payment/net income and age. It would make me feel a little uncomfortable too.

The downside is that the money you put into the house avoids 3.875% interest but you lose the opportunity to compound it at a potentially higher rate in the market but then again it might not. The mortgage paydown is more definite. You should do what you feel comfortable doing and it seems like that's lowering your mortgage payment.

Enjoy your new house.

delamer
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Re: Re-casting mortgage

Post by delamer » Sat Jul 07, 2018 11:15 am

With $14K in monthly expenses, it would be a good idea to have an emergency fund of $80K (6 months) unless both if you have secure jobs. Plus some money set aside for house and car repairs (etc.).

So keep in $100K in savings, and then recast with what’s left if it would make you more comfortable.

You won’t be increasing savings though, you’ll just be shifting your assets around.

mortfree
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Re: Re-casting mortgage

Post by mortfree » Sat Jul 07, 2018 11:59 am

With a $6k mortgage payment I’ll assume you have enough interest that you are above the new $24k standard deduction. Maybe that is another thing to consider depending on your tax bracket.

Either way I would take the 250k, set in high interest savings account and draw from that each month to pay the mortgage. That should cover 3.5 years or so of payments.

I would take 6k from monthly pay and invest it according to your asset allocation (stocks:fixed income). Increase 401k contributions.

Reason being is that I would not want more money tied up into the house.

Assumptions that you are not paying PMI.

ryman554
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Re: Re-casting mortgage

Post by ryman554 » Sat Jul 07, 2018 12:26 pm

It's unclear if your take-home includes 401(k) or other such investments.

I calculate close to $200k take home, so this could be anywhere from 300 to 450k in total salary.
You have about a 1.3M mortgage. That's a lot for a 300k salary, perhaps OK for a 450k salary. For the bay area, that's a step above a starter house, or a starter home near palo alto. I can gather that you are early in your career or new to the HCOL.

Is the $250k all the savings you have left outside of your house? I suspect that it is.

You are very house poor. I see no point in contributing any further. I see you also have car payments. Get rid of those. Your 14k monthly budget seems.. large, even accounting for daycare. at 2k/kid, you've still got 4k/month in car+food.

Are you accounting for property tax of $20k/year? That's going to be a nasty bill -- it eats up all the rest of your budget.

Strongly suggest you get rid of the 529 and contribute to a roth, instead. It's going to be tight until you get the kids out of daycare.

ryman554
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Re: Re-casting mortgage

Post by ryman554 » Sat Jul 07, 2018 12:29 pm

mortfree wrote:
Sat Jul 07, 2018 11:59 am
With a $6k mortgage payment I’ll assume you have enough interest that you are above the new $24k standard deduction. Maybe that is another thing to consider depending on your tax bracket.
A 6k mortgage payment corresponds to a 1.3M house or so. There is a limit (750k, now?) on the deductibility, anyhow, so prepaying won't (or shouldn't) affect the mortgage interest deduction in any way.

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grabiner
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Re: Re-casting mortgage

Post by grabiner » Sun Jul 08, 2018 7:51 pm

ashagru wrote:
Sat Jul 07, 2018 10:36 am
Hi All: Recently, we purchased a house in a HCOL area. My monthly mortgage is ~6k. While we can afford this, I do want to reduce this to more manageable levels. Our mortgage interest rate is 3.875 on a 30-year fixed rate loan.

I have ~$250k additional funds that I did not use for the downpayment. My bank allows recasting, but after closing they told me that I have to wait for 90-days to recast.
See Paying down loans versus investing on the wiki.

Since you are recasting the mortgage, you will be reducing every payment for the next 30 years. This is equivalent to a bond portfolio with a duration of about 12 years.

3.875% is a good return for a tax-free bond (if you don't lose any deduction because your loan balance stays over $750K), but a poor return for a taxable bond (if you lose itemized deductions). These are fair comparisons, as you can take the risk of a stock investment even if you do pay down the mortgage, by moving bonds to stock in your IRA.
Wiki David Grabiner

ashagru
Posts: 23
Joined: Sun Mar 29, 2015 11:51 pm

Re: Re-casting mortgage

Post by ashagru » Thu Jul 12, 2018 4:44 pm

Thanks this makes sense.
delamer wrote:
Sat Jul 07, 2018 11:15 am
With $14K in monthly expenses, it would be a good idea to have an emergency fund of $80K (6 months) unless both if you have secure jobs. Plus some money set aside for house and car repairs (etc.).

So keep in $100K in savings, and then recast with what’s left if it would make you more comfortable.

You won’t be increasing savings though, you’ll just be shifting your assets around.

ashagru
Posts: 23
Joined: Sun Mar 29, 2015 11:51 pm

Re: Re-casting mortgage

Post by ashagru » Thu Jul 12, 2018 4:47 pm

Agree on your feedback. I realized that we will be very house poor, but due to various circumstances, this is the house we ended up in.

Outside of the house, I have ~700k in savings ($250k cash, $300k in commercial property, $150k in other investments). Salary with bonus is $450k.

With the above information, do you change your recommendation about contributing to the house or not? Thanks.
ryman554 wrote:
Sat Jul 07, 2018 12:26 pm
It's unclear if your take-home includes 401(k) or other such investments.

I calculate close to $200k take home, so this could be anywhere from 300 to 450k in total salary.
You have about a 1.3M mortgage. That's a lot for a 300k salary, perhaps OK for a 450k salary. For the bay area, that's a step above a starter house, or a starter home near palo alto. I can gather that you are early in your career or new to the HCOL.

Is the $250k all the savings you have left outside of your house? I suspect that it is.

You are very house poor. I see no point in contributing any further. I see you also have car payments. Get rid of those. Your 14k monthly budget seems.. large, even accounting for daycare. at 2k/kid, you've still got 4k/month in car+food.

Are you accounting for property tax of $20k/year? That's going to be a nasty bill -- it eats up all the rest of your budget.

Strongly suggest you get rid of the 529 and contribute to a roth, instead. It's going to be tight until you get the kids out of daycare.

Admiral
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Re: Re-casting mortgage

Post by Admiral » Thu Jul 12, 2018 7:36 pm

If you have 250k laying around, that corresponds to almost 20% of a $1.3m mortgage. Did you look into a refinance instead of a recast? What rates are available?

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