Mortgage recast then keep paying down principal

[gomsoon]

Hello!

I bought my first house in May this year with around $700,000 mortgage at 5.4% 10-ARM. Started paying extra and I paid about $100,000 extra principal payment so far without doing any recasting. My understanding is that if I continue to pay extra on principal then my mortgage duration will be reduced. Recasting will result in same duration for the mortgage but lower monthly payment. I checked to see that I am eligible for recasting and it costs $100. I didn't think to do recasting because my goal was to pay off the mortgage early. But it dawned on me that what would be the down side for me to recast, then have lower monthly payment and then continue to pay mortgage down with extra principal payments? Wouldn't that not only lower my monthly payment and if I continue to pay down principal with extra money to principal then also reduce the duration?

Thank you!

[Rocky Mtn Man]

It will all work out to be the same, you will just have lost the $100 recasting fee. The recasting can be a good idea if you have a one time bolus of money. Say a rich uncle gave you something in his will. Recast and lower your monthly payment for the rest of the loan.

If you have a steady supply of extra money each month, just keep paying more principle. Each month the interest you owe will decrease.

[exodusNH]

Hello!

I bought my first house in May this year with around $700,000 mortgage at 5.4% 10-ARM. Started paying extra and I paid about $100,000 extra principal payment so far without doing any recasting. My understanding is that if I continue to pay extra on principal then my mortgage duration will be reduced. Recasting will result in same duration for the mortgage but lower monthly payment. I checked to see that I am eligible for recasting and it costs $100. I didn't think to do recasting because my goal was to pay off the mortgage early. But it dawned on me that what would be the down side for me to recast, then have lower monthly payment and then continue to pay mortgage down with extra principal payments? Wouldn't that not only lower my monthly payment and if I continue to pay down principal with extra money to principal then also reduce the duration?

Thank you!

The benefit of a recast is that your minimum payment is now lower. If you have upcoming expenses (e.g. college tuition) or might lose your job, having the smaller minimum could make life easier.

You can, of course, continue paying off the loan like you have been. That will reduce the term the same. You're paying $100 for the option to have a smaller monthly payment, but not the obligation to pay only that amount.

[Meg77]

If your goal is to pay the loan off early, don't bother recasting. It doesn't save you anything math-wise. Paying extra principal moves you forward in the amortization schedule, and recasting stretches back out the amortization schedule, eliminating your progress. Banks allow recasting because they will end up earning more interest over a longer loan duration.

Recasting is typically used when someone buys a new house before they sell their former home. So they may put down a very small amount and have much larger payments than they want/planned until the old house sells and they can use that equity to pay down the loan and get a more appropriate payment.

[Admiral]

If you have so much extra cash laying around that you've already paid $100k(!) extra, why would you care about lowering your monthly payment? That's the point of a recast: a lump sum is made and the loan is re-amortized with the smaller balance, and thus the payment is lower. The duration does not change.

What happens to the ARM in year 10?

I'd propose that you'd likely be better off investing all that extra money and then refinancing in a few years when 1) your balance will be lower and/or 2) you can get a fixed 15 year mortgage at a lower interest rate.

W/o a full financial picture it's hard to know whether throwing all that liquidity at an illiquid asset is wise. If you have millions, maybe. If you don't, probably not.

[gomsoon]

If you have so much extra cash laying around that you've already paid $100k(!) extra, why would you care about lowering your monthly payment? That's the point of a recast: a lump sum is made and the loan is re-amortized with the smaller balance, and thus the payment is lower. The duration does not change.

What happens to the ARM in year 10?

I'd propose that you'd likely be better off investing all that extra money and then refinancing in a few years when 1) your balance will be lower and/or 2) you can get a fixed 15 year mortgage at a lower interest rate.

W/o a full financial picture it's hard to know whether throwing all that liquidity at an illiquid asset is wise. If you have millions, maybe. If you don't, probably not.

I think the thought of having so much debt to be is mentally taxing and anxiety-inducing. And paying ~ $3000 in interest alone every month seems like a lot of money and thought it would be wise to try to lower that.

ARM in 10 years will adjust to market rate but I hope to pay it off before that.

[queenofthemadhouse]

I would only recast if I anticipate a need to lower payments.

I can think of several reasons that might happen, but if I saw those reasons coming, I would probably slow repayment and stockpile cash instead.

[Admiral]

If you have so much extra cash laying around that you've already paid $100k(!) extra, why would you care about lowering your monthly payment? That's the point of a recast: a lump sum is made and the loan is re-amortized with the smaller balance, and thus the payment is lower. The duration does not change.

What happens to the ARM in year 10?

I'd propose that you'd likely be better off investing all that extra money and then refinancing in a few years when 1) your balance will be lower and/or 2) you can get a fixed 15 year mortgage at a lower interest rate.

W/o a full financial picture it's hard to know whether throwing all that liquidity at an illiquid asset is wise. If you have millions, maybe. If you don't, probably not.

I think the thought of having so much debt to be is mentally taxing and anxiety-inducing. And paying ~ $3000 in interest alone every month seems like a lot of money and thought it would be wise to try to lower that.

ARM in 10 years will adjust to market rate but I hope to pay it off before that.

Why does paying $3,000 of interest per month induce anxiety, but not paying five times that in extra payments into an illiquid asset?

If you remove the emotions ("mentally taxing") and consider only the math, you are currently tying up you entire required mortgage payment (whatever that is, you don't say) plus $16,666 per month (which is your $100k/6 mos since origination), with the extra payments being used to lower a 5.4% debt. However, you could, instead, invest the $16,000 into a MM fund and earn 5% (before taxes). So, you'd be earning slightly less than your mortgage debt but with the advantage of a large amount of liquidity. If you did this for 5 years you'd likely be able to pay off most or all of the loan. (Naturally fixed income rates might fall, and/or mortgage rates might fall, allowing you to refinance.)

Pre-paying $16k per month might make you feel better, but it also means all that money is tied up in your house. If you don't need that liquidity, that's fine: which is why I suggested that having a more total financial picture could be useful.

In general if you want to pay less interest, it's better to refinance to a lower rate and a shorter term. Why not hold that $100k for a year or two and see where things shake out? If nothing else you could refinance and put a big lump sum (that $200k you've saved) and end up paying less interest, while still maintaining liquidity.

Right now the only money you're saving (in real terms) is future inflated dollars.

[gomsoon]

If you have so much extra cash laying around that you've already paid $100k(!) extra, why would you care about lowering your monthly payment? That's the point of a recast: a lump sum is made and the loan is re-amortized with the smaller balance, and thus the payment is lower. The duration does not change.

What happens to the ARM in year 10?

I'd propose that you'd likely be better off investing all that extra money and then refinancing in a few years when 1) your balance will be lower and/or 2) you can get a fixed 15 year mortgage at a lower interest rate.

W/o a full financial picture it's hard to know whether throwing all that liquidity at an illiquid asset is wise. If you have millions, maybe. If you don't, probably not.

I think the thought of having so much debt to be is mentally taxing and anxiety-inducing. And paying ~ $3000 in interest alone every month seems like a lot of money and thought it would be wise to try to lower that.

ARM in 10 years will adjust to market rate but I hope to pay it off before that.

Why does paying $3,000 of interest per month induce anxiety, but not paying five times that in extra payments into an illiquid asset?

If you remove the emotions ("mentally taxing") and consider only the math, you are currently tying up you entire required mortgage payment (whatever that is, you don't say) plus $16,666 per month (which is your $100k/6 mos since origination), with the extra payments being used to lower a 5.4% debt. However, you could, instead, invest the $16,000 into a MM fund and earn 5% (before taxes). So, you'd be earning slightly less than your mortgage debt but with the advantage of a large amount of liquidity. If you did this for 5 years you'd likely be able to pay off most or all of the loan. (Naturally fixed income rates might fall, and/or mortgage rates might fall, allowing you to refinance.)

Pre-paying $16k per month might make you feel better, but it also means all that money is tied up in your house. If you don't need that liquidity, that's fine: which is why I suggested that having a more total financial picture could be useful.

In general if you want to pay less interest, it's better to refinance to a lower rate and a shorter term. Why not hold that $100k for a year or two and see where things shake out? If nothing else you could refinance and put a big lump sum (that $200k you've saved) and end up paying less interest, while still maintaining liquidity.

Right now the only money you're saving (in real terms) is future inflated dollars.

Thank you! I didn't think about it like that. Paying extra down towards mortgage doesn't affect my day to day life but I felt like $3000 interest is "wasted." That extra money towards mortgage is at least something I will be able to use later in the future albeit in distant future. But you are right that I can just save that and have liquidity although I do have other liquid assets so paying down mortgage doesn't affect my ability to react to short term financial changes. Tough choices..

[bmsuter]

If you have so much extra cash laying around that you've already paid $100k(!) extra, why would you care about lowering your monthly payment? That's the point of a recast: a lump sum is made and the loan is re-amortized with the smaller balance, and thus the payment is lower. The duration does not change.

What happens to the ARM in year 10?

I'd propose that you'd likely be better off investing all that extra money and then refinancing in a few years when 1) your balance will be lower and/or 2) you can get a fixed 15 year mortgage at a lower interest rate.

W/o a full financial picture it's hard to know whether throwing all that liquidity at an illiquid asset is wise. If you have millions, maybe. If you don't, probably not.

I think the thought of having so much debt to be is mentally taxing and anxiety-inducing. And paying ~ $3000 in interest alone every month seems like a lot of money and thought it would be wise to try to lower that.

ARM in 10 years will adjust to market rate but I hope to pay it off before that.

Why does paying $3,000 of interest per month induce anxiety, but not paying five times that in extra payments into an illiquid asset?

If you remove the emotions ("mentally taxing") and consider only the math, you are currently tying up you entire required mortgage payment (whatever that is, you don't say) plus $16,666 per month (which is your $100k/6 mos since origination), with the extra payments being used to lower a 5.4% debt. However, you could, instead, invest the $16,000 into a MM fund and earn 5% (before taxes). So, you'd be earning slightly less than your mortgage debt but with the advantage of a large amount of liquidity. If you did this for 5 years you'd likely be able to pay off most or all of the loan. (Naturally fixed income rates might fall, and/or mortgage rates might fall, allowing you to refinance.)

Pre-paying $16k per month might make you feel better, but it also means all that money is tied up in your house. If you don't need that liquidity, that's fine: which is why I suggested that having a more total financial picture could be useful.

In general if you want to pay less interest, it's better to refinance to a lower rate and a shorter term. Why not hold that $100k for a year or two and see where things shake out? If nothing else you could refinance and put a big lump sum (that $200k you've saved) and end up paying less interest, while still maintaining liquidity.

Right now the only money you're saving (in real terms) is future inflated dollars.

Thank you! I didn't think about it like that. Paying extra down towards mortgage doesn't affect my day to day life but I felt like $3000 interest is "wasted." That extra money towards mortgage is at least something I will be able to use later in the future albeit in distant future. But you are right that I can just save that and have liquidity although I do have other liquid assets so paying down mortgage doesn't affect my ability to react to short term financial changes. Tough choices..

I'm in the same situation as you. I split the difference as far as paying down the mortgage and investing. I personally don't use the money market as comparing the 5.4% on the mortgage vs. say 5% on a money market is pointless. The mortgage paydown is a tax-free return. My tax rate on money market and savings is roughly 40%, so the real return is only 3%. I like you have plenty of other liquid assets so the having this money available for short term needs is a non-issue.