Recast plus lump sum prepayment -

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jrobinsonrx
Posts: 2
Joined: Sun Aug 26, 2018 7:06 pm

Recast plus lump sum prepayment -

Post by jrobinsonrx » Sun Aug 26, 2018 7:57 pm

We recently bought a home and were able to put 20% down on a 30 year mortgage. Our previous home, which had been paid off, sold after a short time on the market, and now we have approximately $120k to invest or pay down the mortgage. (we're using some cash for home and QOL improvements in the new home)

Other than a 2017 minivan with $25000 at 0.9% (~$500/month) with 4 years left on it, we have no other significant debt.
We pay credit cards off monthly.
We invest diligently into a 401K and a 529B, as well as a ROTH, although we're not quite maxing out the investments while we re-evaluate the new mortgage laden budget.
Emergency supply, with new mortgage, is about 6 months.
However, the new monthly budget is much tighter than I want.

The mortgage is currently $261k at 4.4%. I had planned on recasting the mortgage when allowed in 6 months to give us a little more flexibility in the budget, but now I'm considering splitting the $120k into a recast and a lump sum principle payment.

If I prepay first, I'll effectively cut off about 12 years off the loan, but I'm curious if I recast after that if they'll expand the terms of the mortgage back out to 29.5 years or leave it a around 18 years.

My question is, is it better to Recast then Prepay, or to Prepay then Recast, or does it really matter at all?

I suppose I could put the whole thing in an index fund and use the capital gains to pay down the mortgage yearly. Any other options?

Thanks for your time and consideration.

niceguy7376
Posts: 2148
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: Recast plus lump sum prepayment -

Post by niceguy7376 » Sun Aug 26, 2018 8:24 pm

Looks like this new home purchase is going to be tight on your monthly budget. You are also NOT maximizing your 401k and IRAs
With the sale of the old home, I would first try to hit the max on the 401k and IRAs for this year (say 10K).

If the extra 500 that you put towards car loan gives you the comfort level in monthly budget while still maximizing the 401k and IRAs, I will go ahead and pay off the car loan for cash flow resolution. That will leave with around 90K.

I would then pay around 50K towards principal and then do a recast (which will only reduce the monthly payment down but still have the initial loan timelines of 30 years since you got the loan).

If you want to reduce the time period, then you either need to refinance or start paying more than required after the recast.

Jablean
Posts: 250
Joined: Sat Jun 02, 2018 2:38 pm

Re: Recast plus lump sum prepayment -

Post by Jablean » Sun Aug 26, 2018 9:23 pm

You only need to recast if you need a lower mortgage payment. They'll spread your payments out over the remainder of your original term. If you pay off your car and build your emergency amount up to one year then you can put extra toward the mortgage every quarter etc as you learn to stay in your new budget. You could do a three or five year CD ladder to keep the money out of casual hands while effectively halving the mortgage for those months. If your budget stays good then you won't need a lower payment and you just stay on schedule and pay off early.

SimonJester
Posts: 1658
Joined: Tue Aug 16, 2011 12:39 pm

Re: Recast plus lump sum prepayment -

Post by SimonJester » Mon Aug 27, 2018 9:21 am

niceguy7376 wrote:
Sun Aug 26, 2018 8:24 pm
Looks like this new home purchase is going to be tight on your monthly budget. You are also NOT maximizing your 401k and IRAs
With the sale of the old home, I would first try to hit the max on the 401k and IRAs for this year (say 10K).

If the extra 500 that you put towards car loan gives you the comfort level in monthly budget while still maximizing the 401k and IRAs, I will go ahead and pay off the car loan for cash flow resolution. That will leave with around 90K.

I would then pay around 50K towards principal and then do a recast (which will only reduce the monthly payment down but still have the initial loan timelines of 30 years since you got the loan).

If you want to reduce the time period, then you either need to refinance or start paying more than required after the recast.
This, but I would add when the dust settles, take the $500, plus the savings from the recast and keep paying them towards the principal every month.
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

Nate79
Posts: 3604
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Recast plus lump sum prepayment -

Post by Nate79 » Mon Aug 27, 2018 9:57 am

I would put the lump sum towards a recast. You then have the option to pay the new payment amount or a higher amount. Effectively this is the same thing as doing the lump sum + principle payment except gives more flexibility in the future whether to pay the lower mortgage payment or a higher amount.

I think people get confused about how mortgage interest work and think amortization tables are super complicated. The amount of interest you pay each month is 1/12* interest rate * remaining principle. So whether you make a recast payment only or lump sum + principle payment the end effect is the same as the remaining principle will be the same. So the amount of interest paid that month will be exactly the same since the interest rate is not changing. The only thing that changes is whether you want to pay the mortgage off sooner which you can still do by just making extra payments above the new recast payment amount.

Dottie57
Posts: 4669
Joined: Thu May 19, 2016 5:43 pm

Re: Recast plus lump sum prepayment -

Post by Dottie57 » Mon Aug 27, 2018 10:18 am

SimonJester wrote:
Mon Aug 27, 2018 9:21 am
niceguy7376 wrote:
Sun Aug 26, 2018 8:24 pm
Looks like this new home purchase is going to be tight on your monthly budget. You are also NOT maximizing your 401k and IRAs
With the sale of the old home, I would first try to hit the max on the 401k and IRAs for this year (say 10K).

If the extra 500 that you put towards car loan gives you the comfort level in monthly budget while still maximizing the 401k and IRAs, I will go ahead and pay off the car loan for cash flow resolution. That will leave with around 90K.

I would then pay around 50K towards principal and then do a recast (which will only reduce the monthly payment down but still have the initial loan timelines of 30 years since you got the loan).

If you want to reduce the time period, then you either need to refinance or start paying more than required after the recast.
This, but I would add when the dust settles, take the $500, plus the savings from the recast and keep paying them towards the principal every month.
+1

chevca
Posts: 1918
Joined: Wed Jul 26, 2017 11:22 am

Re: Recast plus lump sum prepayment -

Post by chevca » Mon Aug 27, 2018 10:42 am

Pretty much what niceguy above said.

I'd pay the car off first in this situation. Sure, it's a low interest rate. But, if you're strapped for cash each month, hanging onto a $500/month payment when you can pay the loan off makes little sense to me.

Then, I'd put maybe $50k towards the mortgage principal while doing the recast.

Doing those would free up, what, $800/month or so? That should make things more comfortable each month.

The remaining $45k could go to EF, mortgage pay down, investments, or....

barnaclebob
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Joined: Thu Aug 09, 2012 10:54 am

Re: Recast plus lump sum prepayment -

Post by barnaclebob » Mon Aug 27, 2018 10:59 am

You have to prepay before you recast. A recast only works if you are ahead on your amortization schedule. It just re-amortizes your current principle to the original time of the loan by lowering your required payment. If you kept paying the same anyway then the recast doesn't matter.

delamer
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Joined: Tue Feb 08, 2011 6:13 pm

Re: Recast plus lump sum prepayment -

Post by delamer » Mon Aug 27, 2018 11:49 am

If your main concern is monthly cash flow, then pay off the car loan and invest the rest of the lump sum (including maxing retirement accounts).

If paying off the car won’t free up enough cash flow, then don’t pay off the car loan. Instead, use the lump sum to cover the shortfall until you are eligible to recast. Then do enough of a recast to ease your cash flow. Invest any remainder.

NextMil
Posts: 505
Joined: Wed Dec 13, 2017 12:33 pm

Re: Recast plus lump sum prepayment -

Post by NextMil » Mon Aug 27, 2018 7:37 pm

Dottie57 wrote:
Mon Aug 27, 2018 10:18 am
SimonJester wrote:
Mon Aug 27, 2018 9:21 am
niceguy7376 wrote:
Sun Aug 26, 2018 8:24 pm
Looks like this new home purchase is going to be tight on your monthly budget. You are also NOT maximizing your 401k and IRAs
With the sale of the old home, I would first try to hit the max on the 401k and IRAs for this year (say 10K).

If the extra 500 that you put towards car loan gives you the comfort level in monthly budget while still maximizing the 401k and IRAs, I will go ahead and pay off the car loan for cash flow resolution. That will leave with around 90K.

I would then pay around 50K towards principal and then do a recast (which will only reduce the monthly payment down but still have the initial loan timelines of 30 years since you got the loan).

If you want to reduce the time period, then you either need to refinance or start paying more than required after the recast.
This, but I would add when the dust settles, take the $500, plus the savings from the recast and keep paying them towards the principal every month.
+1
+2

ryman554
Posts: 1108
Joined: Sun Jan 12, 2014 9:44 pm

Re: Recast plus lump sum prepayment -

Post by ryman554 » Tue Aug 28, 2018 8:28 am

NextMil wrote:
Mon Aug 27, 2018 7:37 pm
Dottie57 wrote:
Mon Aug 27, 2018 10:18 am
SimonJester wrote:
Mon Aug 27, 2018 9:21 am
niceguy7376 wrote:
Sun Aug 26, 2018 8:24 pm
Looks like this new home purchase is going to be tight on your monthly budget. You are also NOT maximizing your 401k and IRAs
With the sale of the old home, I would first try to hit the max on the 401k and IRAs for this year (say 10K).

If the extra 500 that you put towards car loan gives you the comfort level in monthly budget while still maximizing the 401k and IRAs, I will go ahead and pay off the car loan for cash flow resolution. That will leave with around 90K.

I would then pay around 50K towards principal and then do a recast (which will only reduce the monthly payment down but still have the initial loan timelines of 30 years since you got the loan).

If you want to reduce the time period, then you either need to refinance or start paying more than required after the recast.
This, but I would add when the dust settles, take the $500, plus the savings from the recast and keep paying them towards the principal every month.
+1
+2
-10.

I'm all for paying down the mortgage, but in this case, where the plan is to continue to pay the same amount each and every month, the recasting is a completely unnecessary step that only costs you money. They get you with a recast fee, and they get you in more interest if you want to pay less each month. Recast only when/if you have or foresee a cash flow crisis. Or if you want to pay less on your mortgage and invest in the market.

I personally, don't agree with paying down a mortgage until I'm getting ready to pay it off, but if you do prepay the mortgage and pay it down often, just continue to do that.

jrobinsonrx
Posts: 2
Joined: Sun Aug 26, 2018 7:06 pm

Re: Recast plus lump sum prepayment -

Post by jrobinsonrx » Tue Aug 28, 2018 11:42 am

Thanks everyone. I really appreciate all the information.

I wouldn’t say that we were strapped for cash or that we have a cash flow crisis necessarily. We originally were going to simply pay 20% down on the house, then put the proceeds from the sale down also.

But I’ve got 3 kids under 4 and I’m expecting all the costs that come with sports, activities, injuries, and braces. And having more flexibility in the budget is a priority for my nerves.
niceguy7376 wrote:
Sun Aug 26, 2018 8:24 pm
Looks like this new home purchase is going to be tight on your monthly budget. You are also NOT maximizing your 401k and IRAs
With the sale of the old home, I would first try to hit the max on the 401k and IRAs for this year (say 10K).

If the extra 500 that you put towards car loan gives you the comfort level in monthly budget while still maximizing the 401k and IRAs, I will go ahead and pay off the car loan for cash flow resolution. That will leave with around 90K.

I would then pay around 50K towards principal and then do a recast (which will only reduce the monthly payment down but still have the initial loan timelines of 30 years since you got the loan).

If you want to reduce the time period, then you either need to refinance or start paying more than required after the recast.
This info is perfect. Thank you, and everyone, for helping me.

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