Mortgage Recast vs. Investing vs. ??

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crazylightgirl
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Mortgage Recast vs. Investing vs. ??

Postby crazylightgirl » Wed Apr 19, 2017 2:08 pm

Hi guys,

I'm trying to figure out what's the best option for me for regarding 1) reducing my mortgage and 2) investing.
I do not want to post this question in the personal investing board because my question is really about recasting

quick info:
age: almost 32
married, 1 income
debt: mortgage balance 194k @ 3.8% (value $310k)
student loans 100k
maxing out 401k
maxing out Roth IRA
saving 50% of take home pay
12 mo emergency fund
Estimated need ~2M for retirement based on expenses

If I made a lump sum payment of $100k towards my principle, my mortgage would be reduced by $500/mo
This would raise our take home savings to 66%
our first priority is to get the student loan down; however, as spouse will be graduating soon there is a chance to enter a loan repayment program where they will pay off 80% of the loan in return for guaranteed 2-3 yrs of work (btw the jobs would be the same jobs he would've applied for)
There is also the option to just put the additional savings $500/mo plus his income to pay off student loans aggressively.

OR

Should we focus more on investing as time is on our hands?

bloom2708
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Re: Mortgage Recast vs. Investing vs. ??

Postby bloom2708 » Wed Apr 19, 2017 3:36 pm

You might have to rephrase/update your post. I'm not following completely.

Summary: You have $100k in cash (not counting Emergency Fund) and are considering putting it down on your mortgage.

Once the mortgage goes from $194 to $94, you want to recast/refinance the mortgage to lower the monthly payment?

The $100k in student loans might be partially forgiven so you do not want to pay them off with the $100k.

Another option is to invest the $100k.

Update/edit your post to fill in the gaps if possible. Thanks.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead | | Want to buy something? Watch this first: https://vimeo.com/41152287

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grabiner
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Re: Mortgage Recast vs. Investing vs. ??

Postby grabiner » Wed Apr 19, 2017 9:45 pm

What is the rate on the student loans? If it is higher than the mortgage rate, then you want to pay off the student loans as soon as you know they will not be forgiven. Until then, leave the money in your taxable account, probably in a bond fund since you intend to use it to get rid of a negative bond (a loan).

Since your mortgage is below the market rate, it only makes sense to pay down if you can recast. Otherwise, you are effectively investing the $100K paydown in a very-long-term bond; shortening the mortgage from 30 years to 15 gives you no benefit.
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Watty
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Re: Mortgage Recast vs. Investing vs. ??

Postby Watty » Wed Apr 19, 2017 10:16 pm

crazylightgirl wrote:saving 50% of take home pay.......

as spouse will be graduating soon


Once your spouse graduates and goes to work I would assume that your income will increase significantly and you will have even more disposable income. The downside is that your income may be so high that you can't deduct the interest on the student loan even if you can now.

One thing to keep in mind is that if the student loan is forgiven then that may be reported as taxable income for you so you may need to have a large sum of money saved up to pay the taxes on that.

I would assume that your spouse will graduate this spring and start working this summer.

What to do really depends on the effective after tax interest rate of the student loans. If it is a lot higher than the interest rate on the mortgage, after taxes, then I would just keep the money invested until this summer when you know what your spouse's job will be and if there will be student loan forgiveness.

A couple of things to consider;

1) When your spouse gets a job he or she may be able to arrange for the starting date to be a few weeks after graduation. That would be a good time to take a vacation if you can get the time off. Once both of you are working scheduling vacations may be harder to do.

2) Somewhere in your planning you should save up to buy future cars for cash. If you will need a replacement car in the near future you may want to set some of that money aside in a car fund.

Garthilk
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Re: Mortgage Recast vs. Investing vs. ??

Postby Garthilk » Wed Apr 19, 2017 10:52 pm

Does the mortgage have PMI?

jlcnuke
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Re: Mortgage Recast vs. Investing vs. ??

Postby jlcnuke » Thu Apr 20, 2017 7:11 am

I don't think we have enough information to really give you a great answer. However, I did notice something that doesn't look right to me. You said:
If I made a lump sum payment of $100k towards my principle, my mortgage would be reduced by $500/mo


Unless you refinance the loan, the monthly payment amount won't change by making a large payment to principal, it would just reduce how long the loan takes to repay using standard mortgage agreements.

With a sub-4% interest rate on the mortgage, I'd probably only go 50/50 split monthly if it were me and take half of your extra savings and put it towards principal on the mortgage and put the other half into investments for retirement (above and beyond the maxing out of 401k and IRAs). That way you'll pay off the mortgage faster and kick up your retirement savings some. If you have $100k sitting around beyond your emergency fund, I'd invest at least half of that.

If it were me regarding the student loans, if the student loans are going to be 80% forgiven, prepare for possible taxes on that but also don't aggressively pay them down until they get reduced by that 80%, then get rid of them quickly.

noco-hawkeye
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Re: Mortgage Recast vs. Investing vs. ??

Postby noco-hawkeye » Thu Apr 20, 2017 7:51 am

jlcnuke wrote:I don't think we have enough information to really give you a great answer. However, I did notice something that doesn't look right to me. You said:
If I made a lump sum payment of $100k towards my principle, my mortgage would be reduced by $500/mo


Unless you refinance the loan, the monthly payment amount won't change by making a large payment to principal, it would just reduce how long the loan takes to repay using standard mortgage agreements.


I think the OP was including a recast into this idea as well. Recasting can in fact reduce the payments (as I understand it).

jlcnuke
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Re: Mortgage Recast vs. Investing vs. ??

Postby jlcnuke » Thu Apr 20, 2017 8:27 am

noco-hawkeye wrote:
jlcnuke wrote:I don't think we have enough information to really give you a great answer. However, I did notice something that doesn't look right to me. You said:
If I made a lump sum payment of $100k towards my principle, my mortgage would be reduced by $500/mo


Unless you refinance the loan, the monthly payment amount won't change by making a large payment to principal, it would just reduce how long the loan takes to repay using standard mortgage agreements.


I think the OP was including a recast into this idea as well. Recasting can in fact reduce the payments (as I understand it).


Ah, yeah, I often forget about recasting as I've never had a mortgage that allowed it. Thanks for the clarification.

MI_bogle
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Re: Mortgage Recast vs. Investing vs. ??

Postby MI_bogle » Thu Apr 20, 2017 8:38 am

This sounds like an "ask again later" situation. The mortgage rate is low, your savings rate high. It doesn't strike me as very urgent.

You have a big unknown, IF your husband gets that job and IF they pay off most of his loan, that would potentially change your priorities. How soon is "soon"?

Once you figure out if he gets that job and the loan payment, you will have another puzzle piece in place. My priority would also be the student loan. I would place investing 2nd and mortgage 3rd, due to the low rate

crazylightgirl
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Re: Mortgage Recast vs. Investing vs. ??

Postby crazylightgirl » Thu Apr 20, 2017 10:09 am

bloom2708 wrote:You might have to rephrase/update your post. I'm not following completely.
Summary: You have $100k in cash (not counting Emergency Fund) and are considering putting it down on your mortgage.
Once the mortgage goes from $194 to $94, you want to recast/refinance the mortgage to lower the monthly payment?
The $100k in student loans might be partially forgiven so you do not want to pay them off with the $100k.
Another option is to invest the $100k.
Update/edit your post to fill in the gaps if possible. Thanks.


Sorry if I wasn't clear. What I'm trying to figure out is what is the best use of $100,000?

Should I:

A. Recast my mortgage (balance reduction from $194k to $94k @ 3.875%, 30yrs).
- Not only will this lower my principle, but also my monthly payments by $500. I could potentially use that $500 to pay off student loans or invest

B. Pay off student loans $100k (mix of 2.8 and 6.8%, loan consolidation not available at this time)
- I'm a little hesitant about this because my spouse may have the opportunity to participate in a loan repayment program that will pay off 80% of his loans. Also quite honestly the $100k I would use is money that I earned before the marriage so I feel like if something were to go wrong (knock on wood) that it's money lost

C. Invest it.

Just trying to figure out what's the best use for the money because I really want to save for retirement (goal ~2M) which I believe can be done by maxing 401k, Roth IRA, and also saving 50% of net pay

icefr
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Re: Mortgage Recast vs. Investing vs. ??

Postby icefr » Thu Apr 20, 2017 10:18 am

If the $100k is your pre marriage money then putting it into the mortgage is also commingling it. Personally, I would invest it in an account in just your name if it's your pre marriage money. But others on the forum have different ideas of marriage than I do.

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hand
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Re: Mortgage Recast vs. Investing vs. ??

Postby hand » Thu Apr 20, 2017 10:33 am

If you're considering keeping the $100k in assets separate, you should probably also be considering whether the debt should also be kept separate and specify how the debt is split between you and your spouse.

crazylightgirl
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Re: Mortgage Recast vs. Investing vs. ??

Postby crazylightgirl » Thu Apr 20, 2017 10:42 am

icefr wrote:If the $100k is your pre marriage money then putting it into the mortgage is also commingling it. Personally, I would invest it in an account in just your name if it's your pre marriage money. But others on the forum have different ideas of marriage than I do.


So would you invest the full $100k into a taxable account? If so, would a total stock market be the best option?

jlcnuke
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Re: Mortgage Recast vs. Investing vs. ??

Postby jlcnuke » Thu Apr 20, 2017 10:52 am

crazylightgirl wrote:Sorry if I wasn't clear. What I'm trying to figure out is what is the best use of $100,000?

Should I:

A. Recast my mortgage (balance reduction from $194k to $94k @ 3.875%, 30yrs).
- Not only will this lower my principle, but also my monthly payments by $500. I could potentially use that $500 to pay off student loans or invest

B. Pay off student loans $100k (mix of 2.8 and 6.8%, loan consolidation not available at this time)
- I'm a little hesitant about this because my spouse may have the opportunity to participate in a loan repayment program that will pay off 80% of his loans. Also quite honestly the $100k I would use is money that I earned before the marriage so I feel like if something were to go wrong (knock on wood) that it's money lost

C. Invest it.

Just trying to figure out what's the best use for the money because I really want to save for retirement (goal ~2M) which I believe can be done by maxing 401k, Roth IRA, and also saving 50% of net pay


With the student loan situation, I'd skip "B" entirely.

That leaves you with A and C or some other option not mentioned. You also say you are "saving" 50% of your take home pay currently. With that information, I'd probably go ahead and dump either all, or 1/2, of the $100k on the mortgage and get that payment lowered. I'd take the rest and invest it. I'd then do the same with the 50% you're saving currently and split it between your relatively low-interest debt (mortgage) and your investment portfolio.

As for composition of the portfolio, I'd shoot to keep the same current asset allocation (whatever that is) but shift where the investments are at (taxable vs tax advantaged accounts) based on tax efficiency (i.e. bonds in your 401k instead of the taxable account etc).

icefr
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Re: Mortgage Recast vs. Investing vs. ??

Postby icefr » Thu Apr 20, 2017 4:02 pm

crazylightgirl wrote:
icefr wrote:If the $100k is your pre marriage money then putting it into the mortgage is also commingling it. Personally, I would invest it in an account in just your name if it's your pre marriage money. But others on the forum have different ideas of marriage than I do.


So would you invest the full $100k into a taxable account? If so, would a total stock market be the best option?


Yup, I'd do some combo of total stock market and/or total international depending on your preferred asset allocation. And then just never touch the money for joint things.


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