does mortgage recast make sense in this situation?

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RevFran
Posts: 240
Joined: Sun Jul 07, 2019 4:48 pm

does mortgage recast make sense in this situation?

Post by RevFran »

Dear Bogleheads-

I owe about $325,000, at 2.75%, 14 years remaining, on my residence. This is my only debt. (Previously, I owned the house outright but about a year ago I did a cash out refi, and paid off a rental property mortgage.) I am 44, and single, and I am not sure how long I'll stay in this house. At least three years, very likely ten, probably not 20. I max out my 403b and, when I have self-employment income on the side, my SEP IRA.

I have about twice what I owe sitting in cash and taxable brokerage -- most of that in equity index funds.

My monthly payment (excluding tax/insurance) is about $2300. I would love to free up some of that cash before 14 years elapse. Due to a consulting contract I've just taken on, I am in a position to pay about 4k extra a month, and get the mortgage paid off in 4ish years (which is about the time I expect the consulting gig to wind down), but I can't quite get myself totally peaceful about completely prepaying the mortgage, given the low rate.

I've been thinking that my real goal is perhaps to get the monthly payment down to something I don't notice as much per month -- $800 a month, or $1000 a month or $1200. If that were my monthly payment, I think I'd be happy enough carrying the mortgage through 2035, and taking advantage of the lowrate to put the consulting money in stocks (or, to put most of it in stocks and spend a little on post-Covid travel). My lender either charges $250 or zero to do a recast (standard fee is $250 but it looks to me like it's zero in my state -- I'm confirming that with the lender).

Is the recast the way to go, or am I overthinking/making this more complicated than it needs to be? Should I just prepay month to month, and know I can stop prepaying whenever I want to?

Thanks for your advice!
dallasjava
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Joined: Mon Nov 12, 2018 4:50 pm

Re: does mortgage recast make sense in this situation?

Post by dallasjava »

2.75% is a pretty low interest rate. You should be able to easily earn more than in a S&P 500 fund. I would just invest the 4K/ month and leave your investments alone, but this is your finances not mine. If something happens you will have the savings at your disposal. If the debt bothers you, then take some or all of the 4K month and make extra principle payments.
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grabiner
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Re: does mortgage recast make sense in this situation?

Post by grabiner »

Since your taxable account is twice the size of your mortgage, you don't have any liquidity issues. Therefore, it makes sense to get a risk-free benefit by selling cash or bonds to pay down the mortgage.

How much is that risk-free benefit? If you are in a 32% tax bracket, and are deducting all the interest (your state and local taxes plus charity are more than the standard deduction), the after-tax rate on the mortgage is 1.87%. Paying off the whole mortgage, or paying it down and recasting it, has about a 6-year duration, and the currently available low-risk return with that duration is 1.30% on Admiral shares of Vanguard Long-Term Tax-Exempt. If the gap is that small, it's only worth paying down as much as you can with no tax cost; it isn't worth selling stock for a capital gain, even if you don't change your allocation because you sell bonds to buy an equal amount of stock in your 403(b).

If you don't have any bonds you can sell, but do have bonds because of your risk tolerance, then you can get a better low-risk return by using new money to pay down the mortgage further, and selling bonds in the 403(b) to buy stock, rather than buying stock.

Once you are 100% stock, your risk tolerance will determine whether the risk-free return of paying down the mortgage is better than the risky but potentially higher return of adding stock.
Wiki David Grabiner
Topic Author
RevFran
Posts: 240
Joined: Sun Jul 07, 2019 4:48 pm

Re: does mortgage recast make sense in this situation?

Post by RevFran »

grabiner wrote: Sat May 01, 2021 6:10 pm Since your taxable account is twice the size of your mortgage, you don't have any liquidity issues. Therefore, it makes sense to get a risk-free benefit by selling cash or bonds to pay down the mortgage.

How much is that risk-free benefit? If you are in a 32% tax bracket, and are deducting all the interest (your state and local taxes plus charity are more than the standard deduction), the after-tax rate on the mortgage is 1.87%. Paying off the whole mortgage, or paying it down and recasting it, has about a 6-year duration, and the currently available low-risk return with that duration is 1.30% on Admiral shares of Vanguard Long-Term Tax-Exempt. If the gap is that small, it's only worth paying down as much as you can with no tax cost; it isn't worth selling stock for a capital gain, even if you don't change your allocation because you sell bonds to buy an equal amount of stock in your 403(b).

If you don't have any bonds you can sell, but do have bonds because of your risk tolerance, then you can get a better low-risk return by using new money to pay down the mortgage further, and selling bonds in the 403(b) to buy stock, rather than buying stock.

Once you are 100% stock, your risk tolerance will determine whether the risk-free return of paying down the mortgage is better than the risky but potentially higher return of adding stock.
Thank you! I have decided to hold off on a recast,to just aggressively pay down, using money in cash or bonds only, for the next year or so, and then reassess— but paying down with some restraint, so that I still have 1k or so a month to add to VTSAX.
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