first time buying/selling same time - recast mortgage?

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michael28
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first time buying/selling same time - recast mortgage?

Post by michael28 »

Looking for some advice from the community on buying/selling a home at the same time. This potential sale would happen +12 months from now.
Goal to be competitive in this market would be to buy a new home without a contingency and list current home immediately after buying.

Current savings: ~$80K liquid in stocks or money market accts

Estimated proceeds from sale of current home: $140K
• Live in desired area – even if sale price was $20K less it would not influence the decision to buy without contingency

If buying a $500K home, plan would be to put $50K down from liquid account and put a portion of the proceeds of the sales towards the new mortgage. Amount would depend on proceeds from sale but would look to move all but $20K towards the new home (approx. 25%-30% of $500K house)
Would the best option be to lower payment and reduce interest paid over lifetime of loan be to recast the loan and get a new monthly mortgage with the larger additional principal payment from the proceeds of the first home? Understand that fee can vary but is in the $500 range.

Is there another option I should be thinking about? Ideally I’d like to get 25-30% of the $500K home down but still leave some savings liquid ($20K) for a safety net, etc.

Thank you
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rterickson
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Re: first time buying/selling same time - recast mortgage?

Post by rterickson »

A recast is usually done to gain the flexibility of lower payments.

If you can afford your new mortgage payment, you would pay less interest and pay your loan off faster if you apply whichever proceeds you choose and keep on paying the original amount. If you have the ability to make extra principal payments, then you would be even better off.
stan1
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Re: first time buying/selling same time - recast mortgage?

Post by stan1 »

One way to get liquidity in this situation is through a 401K loan. Of course you need to be responsible about that but it is a technique that can help get additional liquid cash you need to buy the new house before selling the old house.
dandinsac
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Re: first time buying/selling same time - recast mortgage?

Post by dandinsac »

You may be able to buy the home with 10% down and 10-15% home equity line of credit. (I did this a while ago to avoid PMI.) Then, just pay off the HELOC once you sell your existing house.
Carefreeap
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Re: first time buying/selling same time - recast mortgage?

Post by Carefreeap »

Have you confirmed that you can qualify for the new mortgage and keep the existing mortgage?

How old are you and do you have a retirement date?

Interest rates are pretty low, I'd give some thought about whether you're better off keeping the higher mortgage or only putting a portion of the proceeds toward loan pay down.
Every day I can hike is a good day.
chevca
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Re: first time buying/selling same time - recast mortgage?

Post by chevca »

Carefreeap wrote: Thu Dec 19, 2019 10:54 am Have you confirmed that you can qualify for the new mortgage and keep the existing mortgage?
That's what I was thinking too.

OP, are you sure you're in a position to avoid this contingency with your buy/sell plan? From what you say, it doesn't sound like you are. Rather than worry about being a competitive buyer now, it's probably best to see what you qualify for while holding your current mortgage first. It's the mortgage folks you need to worry about first.

It's tough for most to pull off your plan of buying a house and then selling the current one afterwards.
HP-12Cing
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Re: first time buying/selling same time - recast mortgage?

Post by HP-12Cing »

Carefreeap wrote: Thu Dec 19, 2019 10:54 am Have you confirmed that you can qualify for the new mortgage and keep the existing mortgage?
I recast my mortgage on House 1 so that I could qualify for a conventional mortgage on House 2. This can be a good tactic provided you have a fair amount of equity in the first house. Otherwise, the recast will make little difference in the payment amount (which is what the underwriter will use when calculating your debt-to-income ratio).
daheld
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Re: first time buying/selling same time - recast mortgage?

Post by daheld »

rterickson wrote: Thu Dec 19, 2019 10:15 am A recast is usually done to gain the flexibility of lower payments.

If you can afford your new mortgage payment, you would pay less interest and pay your loan off faster if you apply whichever proceeds you choose and keep on paying the original amount. If you have the ability to make extra principal payments, then you would be even better off.
This is all good advice, but I'll just add that you can do both--recast your mortgage and get the flexibility of a lower monthly payment and still make your extra payments. This is exactly what we did and I don't regret it for a second. If times get lean, we have the flexibility. Otherwise, we're chugging along ahead of schedule, paying extra monthly, to pay off a 30 year mortgage in 20 years. All of that is well worth the $200 it cost us to recast.
chevca
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Re: first time buying/selling same time - recast mortgage?

Post by chevca »

michael28 wrote: Wed Dec 18, 2019 5:01 pm If buying a $500K home, plan would be to put $50K down from liquid account and put a portion of the proceeds of the sales towards the new mortgage. Amount would depend on proceeds from sale but would look to move all but $20K towards the new home (approx. 25%-30% of $500K house)
Would the best option be to lower payment and reduce interest paid over lifetime of loan be to recast the loan and get a new monthly mortgage with the larger additional principal payment from the proceeds of the first home? Understand that fee can vary but is in the $500 range.

Is there another option I should be thinking about? Ideally I’d like to get 25-30% of the $500K home down but still leave some savings liquid ($20K) for a safety net, etc.

Thank you
To answer this for you though, OP. It's really six of one, half dozen of the other. Is your goal just to pay less in total interest? Would you continue to pay extra to lower the total interest paid even more?

If you recast right after the new mortgage, you save in total interest from the chunk you threw at the mortgage balance. You never pay interest on that amount again. The recast itself doesn't save you interest paid, as the interest rate stays the same. But, you keep the same amortization schedule. And of course, have the lower monthly payment.

If you just keep the new mortgage, and again the interest rate stays the same, and throw that same chunk of money at that mortgage, you again never pay interest on that amount again. But, you have effectively jumped ahead on the amortization schedule and shortened your mortgage term. Of course, the monthly payment stays the same as when the balance was higher this way. But, you're now paying more towards principal each month due to jumping ahead on the schedule.

Would the bigger monthly payment strain the budget? Would you continue to pay down the mortgage aggressively? If you just want the lower monthly payment, the recast would be good. If you plan to knock out the mortgage ASAP (10 years), not doing the recast, or doing it probably wouldn't matter much, as you would be throwing the monthly payment and lots of extra cash at the mortgage balance.
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dunkmachine
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Re: first time buying/selling same time - recast mortgage?

Post by dunkmachine »

This potential sale would happen +12 months from now.
Current savings: ~$80K liquid in stocks
If you're wanting to use part of your stock allocation as part of your down payment in ~12 months, I'd recommend you move out of stocks now into a CD or MM fund.

As for recasting, as another said, I would use the difference between the initial and recasted P&I payment as a buffer for when you need the extra cash flow if needed. I would recast, and continue paying the the extra payment monthly, if you can afford it. If not, the difference should allow you to max out your retirement accounts.
Topic Author
michael28
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Re: first time buying/selling same time - recast mortgage?

Post by michael28 »

dandinsac wrote: Thu Dec 19, 2019 10:50 am You may be able to buy the home with 10% down and 10-15% home equity line of credit. (I did this a while ago to avoid PMI.) Then, just pay off the HELOC once you sell your existing house.
Thanks for the advice - I had not thought of that option
Topic Author
michael28
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Re: first time buying/selling same time - recast mortgage?

Post by michael28 »

dunkmachine wrote: Thu Dec 19, 2019 12:34 pm
This potential sale would happen +12 months from now.
Current savings: ~$80K liquid in stocks
If you're wanting to use part of your stock allocation as part of your down payment in ~12 months, I'd recommend you move out of stocks now into a CD or MM fund.

As for recasting, as another said, I would use the difference between the initial and recasted P&I payment as a buffer for when you need the extra cash flow if needed. I would recast, and continue paying the the extra payment monthly, if you can afford it. If not, the difference should allow you to max out your retirement accounts.
Here you on getting out of stocks - it’s only about 15-20% of the $80k liquid I referenced. Should probably move that sooner or later but we haven’t set a fixed time to move yet..could be anywhere from 12-36 months so I’ve been ok with that risk given the relative small percent
Topic Author
michael28
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Re: first time buying/selling same time - recast mortgage?

Post by michael28 »

Carefreeap wrote: Thu Dec 19, 2019 10:54 am Have you confirmed that you can qualify for the new mortgage and keep the existing mortgage?

How old are you and do you have a retirement date?

Interest rates are pretty low, I'd give some thought about whether you're better off keeping the higher mortgage or only putting a portion of the proceeds toward loan pay down.
32 years old and no retirement date set. A LONG ways away!
Topic Author
michael28
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Re: first time buying/selling same time - recast mortgage?

Post by michael28 »

chevca wrote: Thu Dec 19, 2019 12:20 pm
michael28 wrote: Wed Dec 18, 2019 5:01 pm If buying a $500K home, plan would be to put $50K down from liquid account and put a portion of the proceeds of the sales towards the new mortgage. Amount would depend on proceeds from sale but would look to move all but $20K towards the new home (approx. 25%-30% of $500K house)
Would the best option be to lower payment and reduce interest paid over lifetime of loan be to recast the loan and get a new monthly mortgage with the larger additional principal payment from the proceeds of the first home? Understand that fee can vary but is in the $500 range.

Is there another option I should be thinking about? Ideally I’d like to get 25-30% of the $500K home down but still leave some savings liquid ($20K) for a safety net, etc.

Thank you
To answer this for you though, OP. It's really six of one, half dozen of the other. Is your goal just to pay less in total interest? Would you continue to pay extra to lower the total interest paid even more?

If you recast right after the new mortgage, you save in total interest from the chunk you threw at the mortgage balance. You never pay interest on that amount again. The recast itself doesn't save you interest paid, as the interest rate stays the same. But, you keep the same amortization schedule. And of course, have the lower monthly payment.

If you just keep the new mortgage, and again the interest rate stays the same, and throw that same chunk of money at that mortgage, you again never pay interest on that amount again. But, you have effectively jumped ahead on the amortization schedule and shortened your mortgage term. Of course, the monthly payment stays the same as when the balance was higher this way. But, you're now paying more towards principal each month due to jumping ahead on the schedule.

Would the bigger monthly payment strain the budget? Would you continue to pay down the mortgage aggressively? If you just want the lower monthly payment, the recast would be good. If you plan to knock out the mortgage ASAP (10 years), not doing the recast, or doing it probably wouldn't matter much, as you would be throwing the monthly payment and lots of extra cash at the mortgage balance.
Shows you how novice I am on the amortization schedule. I did not know if I put a large lump sum against the principal that the interest paid for each mortgage payment after the lump sum would be different? Am I understanding that correct? Obviously if I make a large principal payment and shorten the total duration of mortgage, total interest paid would be less. but I guess I didn’t think about it changing e amount I am putting towards the principal on a monthly basis after I make a lump sum transfer

For those who have bought and sold at same time, say the first time you did it, did you put most of the cash from the first home towards the second? All the funds? A portion? and why?

Appreciate the insight
BillyK
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Re: first time buying/selling same time - recast mortgage?

Post by BillyK »

Unless all the buyers in your market are first time buyers or possibly purchasing 2nd homes, buying with a contingency shouldn’t make you non- competitive with a solid offer. Contingencies are fairly typical in most residential markets. You are making it more complicated by avoiding a contingency.

Speak with an accountant, but yes there are tax benefits for rolling over the net proceeds from the sale of your current home into your new one.

You really need to speak with a good real estate person to walk you through it. It is something a veteran residential real estate person handles all of the time and they should be able to put you at ease with the process.
chevca
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Re: first time buying/selling same time - recast mortgage?

Post by chevca »

michael28 wrote: Thu Dec 19, 2019 8:41 pm Shows you how novice I am on the amortization schedule. I did not know if I put a large lump sum against the principal that the interest paid for each mortgage payment after the lump sum would be different? Am I understanding that correct? Obviously if I make a large principal payment and shorten the total duration of mortgage, total interest paid would be less. but I guess I didn’t think about it changing e amount I am putting towards the principal on a monthly basis after I make a lump sum transfer

For those who have bought and sold at same time, say the first time you did it, did you put most of the cash from the first home towards the second? All the funds? A portion? and why?

Appreciate the insight
Correct. The monthly interest paid is figured off the current balance. If you just stay on schedule, so does the monthly interest. If you throw a large chunk a the mortgage, the monthly interest is figured on the new balance. On just about every mortgage in the US at least. I'm sure there are some out there that don't.

We bought and sold at the same time a couple years ago. We bought new construction and the only way the builder would go under contract with us was with a contingency. No biggie though. We put all the money/equity from the old house into the new one. It was home equity before, we wanted it to stay the same.
Carefreeap
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Re: first time buying/selling same time - recast mortgage?

Post by Carefreeap »

BillyK wrote: Thu Dec 19, 2019 9:42 pm

Speak with an accountant, but yes there are tax benefits for rolling over the net proceeds from the sale of your current home into your new one.
This is an incorrect statement. Rules regarding the rollover profits from a personal residence changed over 20 years ago.
Every day I can hike is a good day.
SanAntionetta
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Re: first time buying/selling same time - recast mortgage?

Post by SanAntionetta »

BillyK wrote: Thu Dec 19, 2019 9:42 pm Unless all the buyers in your market are first time buyers or possibly purchasing 2nd homes, buying with a contingency shouldn’t make you non- competitive with a solid offer. Contingencies are fairly typical in most residential markets. You are making it more complicated by avoiding a contingency. .
This is highly dependent on the market. We are in CT and our realtor advised we’d have a difficult time having a seller accept a contingency, which makes us feel kind of stuck since with two kids in daycare we don’t want the uncertainty of buying without selling.
Topic Author
michael28
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Re: first time buying/selling same time - recast mortgage?

Post by michael28 »

Carefreeap wrote: Fri Dec 20, 2019 7:36 pm
BillyK wrote: Thu Dec 19, 2019 9:42 pm

Speak with an accountant, but yes there are tax benefits for rolling over the net proceeds from the sale of your current home into your new one.
This is an incorrect statement. Rules regarding the rollover profits from a personal residence changed over 20 years ago.
What is the rule? Thought earnings from home sale are tax free if lived there 2 of last 5 years? Does it matter if you roll equity into new home or not?
Topic Author
michael28
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Joined: Thu May 25, 2017 9:36 am

Re: first time buying/selling same time - recast mortgage?

Post by michael28 »

SanAntionetta wrote: Fri Dec 20, 2019 8:39 pm
BillyK wrote: Thu Dec 19, 2019 9:42 pm Unless all the buyers in your market are first time buyers or possibly purchasing 2nd homes, buying with a contingency shouldn’t make you non- competitive with a solid offer. Contingencies are fairly typical in most residential markets. You are making it more complicated by avoiding a contingency. .
This is highly dependent on the market. We are in CT and our realtor advised we’d have a difficult time having a seller accept a contingency, which makes us feel kind of stuck since with two kids in daycare we don’t want the uncertainty of buying without selling.
Same boat here in MN!
Carefreeap
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Re: first time buying/selling same time - recast mortgage?

Post by Carefreeap »

michael28 wrote: Sat Dec 21, 2019 10:19 am
Carefreeap wrote: Fri Dec 20, 2019 7:36 pm
BillyK wrote: Thu Dec 19, 2019 9:42 pm

Speak with an accountant, but yes there are tax benefits for rolling over the net proceeds from the sale of your current home into your new one.
This is an incorrect statement. Rules regarding the rollover profits from a personal residence changed over 20 years ago.
What is the rule? Thought earnings from home sale are tax free if lived there 2 of last 5 years? Does it matter if you roll equity into new home or not?
$250k single $500k married exemption. No it doesn't matter if you roll the equity into a new house or not.
Every day I can hike is a good day.
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