Recast mortgage or not?

[blackadder]

I recently purchased a new home and have a 30 year 1.2M mortgage at 6.12%. After the sale of my previous home I have proceeds of approximately $400k, currently in a savings account at 3.80% APY. My lender offers the option to recast the mortgage, lowering my monthly payment by 1/3rd.

Is this a smart move? With the interest rate higher than savings APY, I understand it would be a more expensive over the 30 year term to leave things the way they are. However, I could chase some higher returns with the $400k using other low-risk investments and get a little closer to 6.12%, and this would be easier if bond yields / mortgage rates go up. If mortgage rates drop in the future, I could refinance the mortgage and add the savings in at that time.

I think the right answer is not to recast, but am I thinking about this correctly?

Thanks!

[Hyperchicken]

Ahem. That's my favorite soap box, so I'm getting on it.

Mortgage recast is illogical. It's a 180 degrees turn.

(1) First, you want to pay down your mortgage quicker, so you pay extra.
(2) Then, you want to pay down your mortgage slower, so you recast.

If (1) is true, you don't want a smaller payment.
If (2) is true, you would not pay extra.

[2commaBH]

Just pay down, no need IMO to recast unless you're having trouble making payments.

[2commaBH]

Ahem. That's my favorite soap box, so I'm getting on it.

Mortgage recast is illogical. It's a 180 degrees turn.

(1) First, you want to pay down your mortgage quicker, so you pay extra.
(2) Then, you want to pay down your mortgage slower, so you recast.

If (1) is true, you don't want a smaller payment.
If (2) is true, you would not pay extra.

Well, maybe we were illogical, but we did recast because we wanted to ease our overall debt burden from a psychological perspective but wanted to keep our low rate for as long as possible and make time value of money work for us. So I guess the premise of your (1) above may not hold for all pre-pay decisions.

[Hyperchicken]

Well, maybe we were illogical, but we did recast because we wanted to ease our overall debt burden from a psychological perspective but wanted to keep our low rate for as long as possible and make time value of money work for us. So I guess the premise of your (1) above may not hold for all pre-pay decisions.

I can't argue with feelings.

If something is illogical but it makes you feel better, it makes you feel better. But it still is illogical.

Just pay down, no need IMO to recast unless you're having trouble making payments.

If "you're having trouble making payments", that's all the more reason to not pay extra. 6% guaranteed return is nice, but not having liquidity crunch is nicer.

[blackadder]

Understood, however the issue of quickly or slowly is somewhat irrelevant to me at this point because I've only made one payment on the mortgage so far. I can't pay it more slowly even if I wanted to. The reason I took out a 1.2M mortgage was because my previous house hadn't sold yet, otherwise I probably would have rolled that equity into the new house to begin with and only taken out an 800k mortgage. That said, now that I actually have the cash in hand, I'm reconsidering.

The payment is uncomfortably high unless I'm supplementing with cash. I wouldn't want to put the $400k directly against the principal now, as I can't really carry the $7k/mo payment with our family income without adjusting lifestyle down to rice and beans.

[2commaBH]

Well, maybe we were illogical, but we did recast because we wanted to ease our overall debt burden from a psychological perspective but wanted to keep our low rate for as long as possible and make time value of money work for us. So I guess the premise of your (1) above may not hold for all pre-pay decisions.

I can't argue with feelings.

If something is illogical but it makes you feel better, it makes you feel better. But it still is illogical.

OK but your premise that the decision to pre-pay is always driven by a desire to pay your mortgage off more quickly isn't correct. And I am certainly quite pleased at the moment to have several extra years on my 30 year fixed at 2%.

[Hyperchicken]

The payment is uncomfortably high unless I'm supplementing with cash. I wouldn't want to put the $400k directly against the principal now, as I can't really carry the $7k/mo payment with our family income without adjusting lifestyle down to rice and beans.

You bought too much house.

Paying down your mortgage does not help because it does not address the fact of having bought too much house.

[2commaBH]

If "you're having trouble making payments", that's all the more reason to not pay extra. 6% guaranteed return is nice, but not having liquidity crunch is nicer.

It's really two decisions though. Pay down or not, and, if so, recast or not. If the answer is don't pay down because of a lack of liquidity, no need to reach the second question.

[barnaclebob]

Ahem. That's my favorite soap box, so I'm getting on it.

Mortgage recast is illogical. It's a 180 degrees turn.

(1) First, you want to pay down your mortgage quicker, so you pay extra.
(2) Then, you want to pay down your mortgage slower, so you recast.

If (1) is true, you don't want a smaller payment.
If (2) is true, you would not pay extra.

In my case risk free interest rates became greater than the mortgage rate so I recasted to reduce my payment then diverted that savings along with my extra principle payment to a money market account.

[2commaBH]

I wouldn't want to put the $400k directly against the principal now.

In order to recast, you have to pay down principal, no?

[barnaclebob]

Understood, however the issue of quickly or slowly is somewhat irrelevant to me at this point because I've only made one payment on the mortgage so far. I can't pay it more slowly even if I wanted to. The reason I took out a 1.2M mortgage was because my previous house hadn't sold yet, otherwise I probably would have rolled that equity into the new house to begin with and only taken out an 800k mortgage. That said, now that I actually have the cash in hand, I'm reconsidering.

The payment is uncomfortably high unless I'm supplementing with cash. I wouldn't want to put the $400k directly against the principal now, as I can't really carry the $7k/mo payment with our family income without adjusting lifestyle down to rice and beans.

In your case id pay the extra and recast. It was the original plan and will make your financial life simpler. If you had taken out an 800k primary mortgage and a 400k second mortgage, you'd for sure be killing that second mortgage. When we bought our second house we did exactly that, take out a second mortgage that would be covered by the sale of our first house.

[blackadder]

You bought too much house.

Paying down your mortgage does not help because it does not address the fact of having bought too much house.

I disagree with that. I'm perfectly comfortable making payments on a $800k mortgage at our current income. However, the extra $2k or so a month to pay the $1.2M mortgage would create a lifestyle crunch. Whether I recast or not, I'm well within my means, thank you. My question is, is there a financial advantage to keeping the cash invested and drawing down on it to supplement the payment?

[blackadder]

I wouldn't want to put the $400k directly against the principal now.

In order to recast, you have to pay down principal, no?

Yes, but the recast adjusts the payment. Just paying the principal would reduce the duration of the loan but the payment would remain the same. That's my understanding of it, at least.

[2commaBH]

In order to recast, you have to pay down principal, no?

Yes, but the recast adjusts the payment. Just paying the principal would reduce the duration of the loan but the payment would remain the same. That's my understanding of it, at least.

Recast adjusts the payment, but only if you pay down principal at the same time.

[2commaBH]

You bought too much house.

Paying down your mortgage does not help because it does not address the fact of having bought too much house.

I disagree with that. I'm perfectly comfortable making payments on a $800k mortgage at our current income. However, the extra $2k or so a month to pay the $1.2M mortgage would create a lifestyle crunch. Whether I recast or not, I'm well within my means, thank you. My question is, is there a financial advantage to keeping the cash invested and drawing down on it to supplement the payment?

If you think you can beat 6.12% on an after tax basis, keep the cash invested. Otherwise pay down.
Most people would probably take the 6.12% risk free return. If you are not comfortable making the monthly payments right now, recast when you pay down. And then watch rates to refi when you can.

[HooCares]

The payment is uncomfortably high unless I'm supplementing with cash. I wouldn't want to put the $400k directly against the principal now, as I can't really carry the $7k/mo payment with our family income without adjusting lifestyle down to rice and beans.

You bought too much house.

Paying down your mortgage does not help because it does not address the fact of having bought too much house.

Don't agree with this. There's a difference between cashflow and affordability.

[aadc]

I was in your position a couple of years ago —some of the numbers were a little different, but same idea. Had a lump sum of around $400k from the sale of our former home after we had purchased a new one and taken out a new jumbo mortgage on it.

We chose to invest about half and use the balance to recast the new mortgage. It lowered our monthly payments by around $1,500 if I recall. We were able to afford the monthly amount before recasting, but we valued the peace of mind that came with knowing we had a little extra cushion on our monthly cash flow. I think the math does favor investing the whole sum. But reducing both the monthly and overall debt burden felt like a reasonable hedge against a job loss, incapacitating even, or something else. I'm happy with the decision a couple of years later, despite the market run-up that's occurred since.

[CoAndy]

Understood, however the issue of quickly or slowly is somewhat irrelevant to me at this point because I've only made one payment on the mortgage so far. I can't pay it more slowly even if I wanted to. The reason I took out a 1.2M mortgage was because my previous house hadn't sold yet, otherwise I probably would have rolled that equity into the new house to begin with and only taken out an 800k mortgage. That said, now that I actually have the cash in hand, I'm reconsidering.

The payment is uncomfortably high unless I'm supplementing with cash. I wouldn't want to put the $400k directly against the principal now, as I can't really carry the $7k/mo payment with our family income without adjusting lifestyle down to rice and beans.

This being the case, I would probably do the recast. What do your investment accounts look like? How much are you able to save and invest every year? If you sent the entire $400k to the mortgage company, would you still have a robust emergency fund?

[stan1]

Given what you've posted so far in your several posts, I'd go for the recast but that's reading into your sentiments not factual information.

If you come back and tell us you earn over $500K/year, save greater than 50% of income, and have over $3M in retirement accounts I'd say it doesn't matter do what you want.

[blackadder]

Understood, however the issue of quickly or slowly is somewhat irrelevant to me at this point because I've only made one payment on the mortgage so far. I can't pay it more slowly even if I wanted to. The reason I took out a 1.2M mortgage was because my previous house hadn't sold yet, otherwise I probably would have rolled that equity into the new house to begin with and only taken out an 800k mortgage. That said, now that I actually have the cash in hand, I'm reconsidering.

The payment is uncomfortably high unless I'm supplementing with cash. I wouldn't want to put the $400k directly against the principal now, as I can't really carry the $7k/mo payment with our family income without adjusting lifestyle down to rice and beans.

This being the case, I would probably do the recast. What do your investment accounts look like? How much are you able to save and invest every year? If you sent the entire $400k to the mortgage company, would you still have a robust emergency fund?

Yes, this cash is separate from my emergency fund and all of my other taxable and retirement investments, which are robust. I don't "need" any of the cash, it's really more a question of whether there's some optimization I can do here. Like the earlier poster asked... can I beat 6.15% risk-free, after tax? If this was my old 3.5% mortgage it would be a no-brainer to keep it. But, I guess the real answer is no.

[blackadder]

I was in your position a couple of years ago —some of the numbers were a little different, but same idea. Had a lump sum of around $400k from the sale of our former home after we had purchased a new one and taken out a new jumbo mortgage on it.

We chose to invest about half and use the balance to recast the new mortgage. It lowered our monthly payments by around $1,500 if I recall. We were able to afford the monthly amount before recasting, but we valued the peace of mind that came with knowing we had a little extra cushion on our monthly cash flow. I think the math does favor investing the whole sum. But reducing both the monthly and overall debt burden felt like a reasonable hedge against a job loss, incapacitating even, or something else. I'm happy with the decision a couple of years later, despite the market run-up that's occurred since.

I'm guessing the mortgage rate was quite a bit lower then?

[Metsfan91]

Recast. You'll be getting 6.12% return on this 400k. Recast will lower your minimum required monthly payment. But, you won't have to reduce your monthly payment. You can keep on paying as you are paying now.

At 6.12%, I'll be recasting if I were you.

[VaR]

Your situation does sound like one where a recast is sensible. How much will it cost you?

Another option if you're patient is to wait a year to see if mortgage rates come down and do a full refinance with cash-in to take your mortgage down to $800k.

But waiting that year would cost you $24k in interest differential, so a recast does seem a better choice even if you're going to refinance after a year.

[grabiner]

Ahem. That's my favorite soap box, so I'm getting on it.

Mortgage recast is illogical. It's a 180 degrees turn.

(1) First, you want to pay down your mortgage quicker, so you pay extra.
(2) Then, you want to pay down your mortgage slower, so you recast.

If (1) is true, you don't want a smaller payment.
If (2) is true, you would not pay extra.

This thread actually gives a nice counterargument. Interest on a mortgage over $750K is not deductible, while interest up to $750K is (until the interest gets low enough that you take the standard deduction). Thus it may be a good deal to pay down the mortgage as quickly as possible to $750K, and then as slowly as possible after that.

For the OP, depending on their tax bracket, the after-tax interest rate on a $750K mortgage may be less than the low-risk return they can get by investing in municipal bonds, so there is no reason to pay down below $750K. (It might still be a good deal for the OP to refinance to a 15-year mortgage rather than recasting, as this will lower the interest cost.)

Here are several other potential counterarguments.

The two moves need not happen at the same time. You could chose to put extra money towards a 4% mortgage rather than buying bonds that yield 2%. Then, years later, with bonds yielding 5%, you would rather buy bonds than pay down the mortgage, and a recast allows you to pay less on the mortgage.

You might make extra payments by spending down a taxable account, but then want to reduce your mortgage payments so that you can contribute more to tax-advantaged accounts. (There is another thread covering this situation; a poster has a windfall which can be used to pay down a mortgage, but might prefer lower payments so that they can max out retirement accounts in future years as well.)

Your situation might have changed after the paydown, such as the birth of a child or a change in your business that causes you to prioritize liquidity and cashflow. (The birth of a child will also give you an option for much more tax-advantaged investment, in a 529 plan.)

You might recast so that you have the option to pay less, without the obligation to do so; this allows you to have a smaller emergency fund.

[Sho]

I recently purchased a new home and have a 30 year 1.2M mortgage at 6.12%. After the sale of my previous home I have proceeds of approximately $400k, currently in a savings account at 3.80% APY. My lender offers the option to recast the mortgage, lowering my monthly payment by 1/3rd.

Is this a smart move? With the interest rate higher than savings APY, I understand it would be a more expensive over the 30 year term to leave things the way they are. However, I could chase some higher returns with the $400k using other low-risk investments and get a little closer to 6.12%, and this would be easier if bond yields / mortgage rates go up. If mortgage rates drop in the future, I could refinance the mortgage and add the savings in at that time.

I think the right answer is not to recast, but am I thinking about this correctly?

Thanks!

OP, I haven’t read all the replies , this is what we did for 6 percent mortgage

Did recast with 400 K from house sale
Now mortgage was lower ( stress is less)

Then we started to put extra money towards principal to pay it off within next few years . Total mortgage was between 650-700K before recasting

Now it’s less than 95 K

Not saying it’s the best financial decision. But I sleep better with that.

[LiveSimple]

Invest the 400 k in total stock index

[LiveSimple]

Invest the 400 k in total stock index

[NabSh]

I was in the same situation in 2020. But at that time interest rate hit bottom low so I just made a large equity payment and then refinanced the remaining amount.

Some questions and considerations
1) if you are single income or have limited stability in career (risk of layoffs) then please consider have some liquid savings. In my case I saved a portion of the equity from previous home

2) if your goal is to lower the monthly payment (as you mentioned). Then please compare the refinance vs recasting in a mortgage calculator . In my case since the rates had gone down significantly it made sense to refinance.

I recently purchased a new home and have a 30 year 1.2M mortgage at 6.12%. After the sale of my previous home I have proceeds of approximately $400k, currently in a savings account at 3.80% APY. My lender offers the option to recast the mortgage, lowering my monthly payment by 1/3rd.

Is this a smart move? With the interest rate higher than savings APY, I understand it would be a more expensive over the 30 year term to leave things the way they are. However, I could chase some higher returns with the $400k using other low-risk investments and get a little closer to 6.12%, and this would be easier if bond yields / mortgage rates go up. If mortgage rates drop in the future, I could refinance the mortgage and add the savings in at that time.

I think the right answer is not to recast, but am I thinking about this correctly?

Thanks!

[guitarguy]

Ahem. That's my favorite soap box, so I'm getting on it.

Mortgage recast is illogical. It's a 180 degrees turn.

(1) First, you want to pay down your mortgage quicker, so you pay extra.
(2) Then, you want to pay down your mortgage slower, so you recast.

If (1) is true, you don't want a smaller payment.
If (2) is true, you would not pay extra.

Mortgage recast is not illogical. This black and white premise is illogical.

You leave out the option to recast and continue to pay the same larger payment. There is no downside to having the option/flexibility to make a smaller payment if you choose to do so. Recasting does not require you to pay off the mortgage slower, nor to make smaller payments.