OT mortgage guys...recast vs lump sum towards principal

[Kingfisher]

Title about sums it up. Which option makes more sense when you have say $50k to put towards loan
Thanks

[Blown Reek]

What you have to bear in mind is that $50K is more like $45K when you factor in the cost of a new bicycle.

[Kingfisher]

What you have to bear in mind is that $50K is more like $45K when you factor in the cost of a new bicycle.

I’m finally done😊. Steel Zanc and Moots in stable

[Ken Robb]

It somewhat depends on what the interest rate is on your present loan. interest rates will probably continue to rise for the foreseeable future. You can already get CDs at 2.5% for 12-14 months. If you have one of the sub-4% loans that were common in the recent past it might make sense to leave it in place and stagger some CD maturity dates to take advantage of rising rates and/or other investment opportunities. If you pay off the mortgage and later need to raise some cash loans will surely cost more. I paid off my 5.5% loan several years ago and my credit rating went down because I no longer showed a long-term loan that was current. :confused:

[Jef58]

I'm interested to hear some thoughts on this myself. I am waffling between paying off my mortgage or investing that into something. My final thought was paying off the mortgage even though it is a 2.65%/15 year. My thinking is, the interest I could save should be more than I can make in investments (??).

Once paid off, then invest what would be the principle and put the interest in a slush fund for emergencies (and for things like bike stuff...) I'm not as financial savvy as I should be, so I plan on talking to my accountant before I do anything.

[tv_vt]

There is that main question of what your mortgage interest rate is versus what type of yield you could get from investing the money. There is a corollary question about the risk involved in those investments. Low risk investments like CDs are paying pitiful returns right now from what I can tell.

Then there is the question of liquidity. If you put every penny of spare cash towards your mortgage principal, what happens if you need cash for an emergency? Corollary question - can you get a good rate on a simple home equity loan/line of credit? And, will you still have some other stash of cash on hand for those emergencies?

You could take a split approach and pay extra towards the principal every month and pay the mortgage off in say 7 years instead of 15. Find some sort of investment to put the rest of the cash in the meantime.

There is also the question of how comfortable you are with debt. I find myself just really feeling burdened by debt mentally - or conversely, just feeling really relieved and unburdened by not having any debt. What is that feeling worth to you?

PS. not exactly sure what you mean by 'recast' in your title...

[Ralph]

Although I feel fairly confident of investment returns of 6% or so over long periods of time....something like a low cost balanced fund from Vanguard...as an example...…..when I retired in 1998....I paid my mortgage off. Just liked idea of being 100% debt free. A good feeling. During recessions...I can live cheap if I need to. Then invest near economy bottoms. Don't have debt eating up my income.

However....from a financial point of view....probably not smart...and there have been some rough financial periods since then with sharp recoveries. I figure future holds more of the same.....with so called experts not so good at predicting the financial future (and I'm a retired Merrill Lynch VP Financial Advisor).

Do what makes you feel good. Or what you feel comfortable doing. Living debt free, or working on being debt free, feels good. And "experts" crystal ball are no better than yours.

[Spaghetti Legs]

A lot of factors go into that choice. I assume by recast, you mean refinance. Some things to consider: how many years from now until you want to retire, what your retirement finances look like now, what your current interest rate on your loan is, how long you plan to stay in your current house - just a few.

In general, extra money is better off invested with most current low rate mortgages, although being debt free is attractive. You still get deduction for mortgage interest. When I have extra funds I want to keep fairly ready access too, I put it in a tax free, low fee (USAA) bond fund which pays about 4%.

[echappist]

I'm interested to hear some thoughts on this myself. I am waffling between paying off my mortgage or investing that into something. My final thought was paying off the mortgage even though it is a 2.65%/15 year. My thinking is, the interest I could save should be more than I can make in investments (??).

Once paid off, then invest what would be the principle and put the interest in a slush fund for emergencies (and for things like bike stuff...) I'm not as financial savvy as I should be, so I plan on talking to my accountant before I do anything.

I think 2-yr brokered CDs are yielding something like 2.8% right now; granted, those just pay coupons and don't compound. Also, you pay taxes on the coupons. So to break even, the yield has to be ~the high 3s.

[OtayBW]

What you have to bear in mind is that $50K is more like $45K when you factor in the cost of a new bicycle.
HAR!! POTD! :banana:

[veloduffer]

I would first make sure you have an ample emergency/rainy day fund; a good measure is about 6 months of living expenses.

As others have said, it depends on the interest rate of your mortgage, where in the payment schedule (near or end of the mortgage), and retirement savings.

If you invest, I would stay high quality stocks or short term bonds or CDs. No need to take a lot of market risk.

Be mindful that we may have recession in the next two years or so. We have two out of three conditions for a recession: Fed tightening, credit conditions becoming weaker (like subprime mortgage but now in corporate loans and bonds); and waiting on economic slowdown. Lots of companies with tons of debt which are currently supported by strong earnings. But as soon as the economy slows, it could start the default cycle.

[NewDFWrider]

As usual, there's a lot of good advice that's been passed around. If I had an extra 50k lying around, I would invest it over 6 months into either an index fund or a low-cost mutual fund (like Vanguard Dividend Growth)--odds are that the returns on your investment will outpace the cost of you paying down your mortgage or recasting the mortgage. My feeling is that money that you've used to buy the house is "dead money". Unless you live in a hot real estate market, real estate appreciates slowly and you'd be able to earn more with an investment in a low-cost diversified stock fund (even after you take into account interest payments).

Paying down your principal on your mortgage gives you no real economic benefit (because your monthly payments remain the same) but may give you psychic benefit because you might feel like you owe someone less money. I don't fully understand how recasting works, but it sounds like you pay a large sum of money, and then the bank recalculates the amortization schedule, which should result in you paying less interest and lower fees. If I'm right in my understanding of recasting, then what you need to do is figure out how much you'd be saving in interest and compare it to what you might earn on 50,000 if you invested it in a low-cost, diversified stock fund over the same period of time (and you would need to somehow take into account the fact that you no longer have $50,000 of flexibility). (My guess is that you'd earn more from the stock fund during most time periods).

As noted above, you haven't noted what your interest rate is, but if you have a low mortgage rate (that is fixed rather than floating), then it may not make sense to pay down the mortgage because (1) if you ever need to borrow again in the near future, it will likely cost more; (2) to the extent you care, you're "overpaying" the bank (and I can explain that in a PM if you wish); and (3) your interest costs are actually pretty low and so your hurdle rate for making another investment pay off is lower.

Anyway, you have a nice problem on your hands. Good luck.

[cmg]

pay the principle off first. keep the bank from earning the projected profit which will 2-3 times what you paid for the house.

[flydhest]

Just a minor point. The rate of appreciation of the house doesn’t really matter. Just think about how much you will earn from one investment after tax —say a CD or a money fund or mutual fund or what have you—versus how much the after-tax interest you pay on the mortgage is.

Then, as noted before, ask how much the liquidity is worth to you. If the money was “found” money and you were fine with your liquidity position, comparing it to longer-term investments like a mutual fund prolly makes sense. If you have been month-to-month and want/need to feel more comfort, compare it to something more liquid. With two-year Treasuries at 3 percent, depending on when you got your mortgage it may be close. If the mortgage is well over 4 percent, then investing in it may make sense.

[Ralph]

Just because the stock market has been going up since the winter of 08/09, or about 10 years now....does not mean it will continue to go up for the indefinite future. There are so many investors now who have never lived thru or experienced a deep recession.

I have no idea when this run ends....but eventually it will. The economy will begin to slow. Professional investors will notice....and begin to sell. The stock market will begin slowing. Especially the more leveraged companies with weaker businesses will decline first, then eventually the so called safe stocks will decline....cut dividend payouts. The Fed will notice and begin to lower interest rates trying to stoke the economy in an effort to avoid the coming slowdown. They don't have a good record of succeeding. Then folks will begin losing their jobs, home prices will decline as there are fewer or no buyers for real estate. And before you know it, we are in a recession. And I usually figure the average recession lasts about 18 months. And that's when I prefer to make my 'bets'.

So be careful assuming you can invest that money for a higher return than your mortgage rate. Maybe yes, maybe no.

I'm a big believer in long term equity investing. But I do not assume that returns we have seen for the past 10 years can be projected very far in the future. So if that's money you need to keep safe, be careful.

I'm only posting this because I see some of the suggestions are to invest the money in safe stocks or safe mutual funds for a higher return. There is no such thing. Like it's automatic with no risk. At a time when the stock market just made an all time high, and the fed is still saying they will raise interest rates thru next year....bonds lose in rising rates. And buying stocks at all time high prices often doesn't work out well.

[buddybikes]

If you are close to paying loan off and truly owning the place, go for it. We did this years ago (19) and never looked back. If it is 50 off a 500K mortgage, not so sure

[Chris]

Head to the casino. Put it all on black.

[C40_guy]

Head to the casino. Put it all on black.

Right. Because even if the OP loses the $45K, he still has that new bike! :)

[MattTuck]

A lot goes into this. and hard to give advice on a single financial decision without knowing the details of your broader situation and life.

Unlike the above person who said only do it if you are paying it off, and not if it is 50 on 500K. Paying off 50 on 500K could make a much bigger impact to the amount of interest you ultimately pay. If you are near the end of your mortgage, most of your payment is going to principle. If you are near the start of your mortgage, most of your payment is going to interest, so there could be some real advantage to lowering principle early in the life of your mortgage.

Lots to think about, you'd have to get out excel and figure ou the details to be sure.

[54ny77]

so many answers to this question, impossible to offer one without more details.

what's current balance, rate & type (adjustable or fixed) and remaining term of existing mortgage? do you plan on staying in the home for many years (15+) or will you move inside of that window?

(these are highly personal q's and you may not want to disclose that, but that's the type of thing you have to keep in mind).

putting $50k towards a high(er) bal loan if doing a rate & term refinance won't move the payment needle much. you're better off just doubling or even tripling the monthly payment for the next 10 years. personally, that's my #1 recommendation to friends who already have a historically low fixed rate 30 year loan and who want to tinker with their mortgage. why? sometimes you might need that cash that is better deployed to do something else....like buy a bike! (just kidding....sorta.)

also, unless you also have 1 year liquid (cash) saved up that'd cover ALL conceivable expenses, keep saving till ya get there. and then start asking yourself this question. i've seen so many guys get in a real pinch via not having enough real liquidity.

[Hellgate]

Buy stock. Amazon, Netflix, Microsoft, etc... Unless your area is appreciating it's not worth it. Even if it is you can't sell a few shares of the house to raise cash.

[wasfast]

I was raised a hard core "no debt" and own your home. That thinking was very much a post-depression approach. I agree with others that not having a mortgage is more mental peace than anything. If I was in my 40's and geographically stable then paying off the mortgage makes some sense because you can divert those same payments to savings/investments.

I do question the approach later in life. You can find yourself very house rich and cash poor. In order to get at that equity, you either have to sell, get a home equity or reverse mortgage. Seems counter productive but it's so dependent on your actual situation.

Keep in mind too that not having a mortgage doesn't mean living without housing cost. There's still property taxes, insurance, upkeep, improvements etc.

[Gummee]

I'll echo the: it's very hard to get equity out of your home when you need it. You basically have 2 choices: sell or get a loan.

If you try to get a loan to get the equity out when you NEED it, you probably won't get it because the bank won't give it to you without qualifying for a loan.

If you can't qualify, all you're left with is selling

Personally, I'd rather have the ABILITY to pay off the loan any time, than have a paid off loan.

...but that's my $.02

M

[cmg]

If you are near the end of your mortgage, most of your payment is going to principle. If you are near the start of your mortgage, most of your payment is going to interest, so there could be some real advantage to lowering principle early in the life of your mortgage.

not sure if this correct. the 50K would go against principle and move the payoff to an earlier end date. the goal is to prevent the bank from receiving all the projected interest over the 30yr period.

[Ozz]

What are terms of current loan versus the re-amortized loan?
Are you extending the terms as well (going from 30 yr to another 30 yr or shortening the term to 15 yrs)?
What is the projected savings in both scenarios?
Have you maxed out 401k, 529 (if you have kids), IRA, HSA, etc?
What else would you do with funds?
Does additional principle let you avoid PMI insurance costs?


Lots more info needed to make informed choice...

[p nut]

You just never know what will happen. Market slow down, job loss, heck, I could get hit on the road. I’ve got a family to provide for. Sometimes, long term gains doesn’t mean anything when there is debt coverage needs now.

I would pay off the mortgage. Use residual income towards investments if wanted/needed.

[quickfeet]

Pay off the mortgage, then start heavily investing the payments that you were making. That’s how you quickly rebuild cash. Not very many people got rich borrowing money to make more money.

[MattTuck]

not sure if this correct. the 50K would go against principle and move the payoff to an earlier end date. the goal is to prevent the bank from receiving all the projected interest over the 30yr period.

That might be right. I have not done a recast before. I understood that it does not shorten the length of the loan. But rather, the payments are calculated again based on a new principle amount. If you still had 13 years on your loan, the new payments would be calculated to work out over 13 years.

Knowing that banks rarely do stuff that doesn't benefit them, I would not be surprised if the new amortization schedule starts from scratch. In other words, when you recast it, you may be paying interest on a lower principle amount, but it would be like going back to the beginning of your loan when 95% of the payment goes to pay interest, and very little of the principle is reduced.

All this is to say that the OP needs to get the details of his specific deal, and model it out to see if it works for him.

Rarely a free lunch when it comes to these things, and having dry powder is a really nice situation, compared to paying off a low interest loan. But if he is already set for emergency funds, then reducing interest costs isn't a bad thing.

[Ken Robb]

On most loans the interest is loaded toward the front of the loan. When considering paying off a loan early one should pull up an amortization chart to see how much interest will have been paid and how much interest vs. principal is in each of the remaining payments. When I was a new Realtor I Having a loan besides a mortgage was VERY uncomfortable for a conservative guy like me. I made a couple of deals and ran down to the bank to pay off my car loan ASAP. As I walked out of the bank I did the math. I multiplied my outstanding number of payments by the payment amount realized that the result was VERY close to what I had just paid to close out the loan. I had saved almost no interest and given up the flexibility of extra cash in the bank.

[Gummee]

Pay off the mortgage, then start heavily investing the payments that you were making. That’s how you quickly rebuild cash. Not very many people got rich borrowing money to make more money.

Personal story time: I was a mortgage broker thru the late 90s and into the early 2000s. I was making pretty good $ and bought a condo in Sandy Eggo. I was living pretty well on my own...

Then the housing market crashed and I went from hero to zero in the space of a few months. Burned thru all my investments, savings, and even borrowed $ from Mom and Dad to save the house. Finally admitted defeat and sold.

...luckily, I sold right before the BIG crash in values, so I made $ which supported me for a bit. I had equity in my walls, but couldn't touch it 'cause it was wrapped up tight. Couldn't get a loan because I couldn't qualify $$ wise any more. No equity because values weren't there any more. The only alternative was selling... Then I didn't have a place to live!

Nope. Sticking your $$ in your walls doesn't seem smart to me any more. That's Depression-era thinking in a new economy. There's no such thing as a pension. Back when there *were* pensions, it made sense to pay off the house early so you could afford to live on the pension and SS. ...but old advice dies hard... Even if it isn't nearly as relative as it once was.

It's up to you to fund retirement. So... that means the longer you can have your money growing for you, the bigger it'll grow. IOW the power of compound interest.

I'll reiterate: IME it's better to have the ability to pay off your mortgage any time, than have a paid off mortgage.

M

[Ozz]

you probably don't want to share your personal financial situation, here, so you should probably talk to your financial planner (not same thing as someone who gets paid when you buy an investment from them, btw) and see what they say.

There are so many variables to consider you could not possibly get a definitive answer here with the info you can provide....the anecdotes provided, while true and personal, are a sample of one and probably not your situation.

Liquidity is great, but so is not having a mortgage...

How stable is your job? How close are you to retirement? plus a couple hundred other questions to consider...


Good luck!

[prototoast]

On most loans the interest is loaded toward the front of the loan.

A couple of people have made this or similar claims, and it is misleading. In a typical fixed rate mortgage, the payments are structured to be equal throughout the entirety of the term, and the interest is based off the outstanding principle in each period. It is not the case that there is a total interest pool for a loan which is "loaded" toward the front of the loan.

In a hypothetical example with 5% periodic interest and a $10 payment, if the outstanding balance was $100, the interest would be $5, and the balance after payment would be $95, with half covering interest and half covering principle. When the outstanding balance is only $50, the interest would be $2.50, so 75% of the payment would cover principle and 25% would cover interest.

$50k into a mortgage at the beginning of the term or the end of the term avoids interest accrual at the same rate.

[Ken Robb]

A couple of people have made this or similar claims, and it is misleading. In a typical fixed rate mortgage, the payments are structured to be equal throughout the entirety of the term, and the interest is based off the outstanding principle in each period. It is not the case that there is a total interest pool for a loan which is "loaded" toward the front of the loan.

In a hypothetical example with 5% periodic interest and a $10 payment, if the outstanding balance was $100, the interest would be $5, and the balance after payment would be $95, with half covering interest and half covering principle. When the outstanding balance is only $50, the interest would be $2.50, so 75% of the payment would cover principle and 25% would cover interest.

$50k into a mortgage at the beginning of the term or the end of the term avoids interest accrual at the same rate.

Some loans are configured using the "Rule of 78" which is how my car loan was made. It's not as common in real estate loans but you still want to look at an amortization table for a specific loan before deciding on an early payoff.

[prototoast]

Some loans are configured using the "Rule of 78" which is how my car loan was made. It's not as common in real estate loans but you still want to look at an amortization table for a specific loan before deciding on an early payoff.

Those loans are illegal nationally for any term longer than 5 years, and in some states banned outright. They're barely a thing anymore and, with the exception of a few people who might be on the tail end of a mortgage grandfathered in, completely irrelevant to the mortgage market.

[danesgod]

Without more info (I didn't see OP comment details), I'd buy $50K VTSAX.

[MattTuck]

A couple of people have made this or similar claims, and it is misleading.

....

$50k into a mortgage at the beginning of the term or the end of the term avoids interest accrual at the same rate.

It is a confusing topic. Yes, the rate is important, but your living expenses are not denominated in rate percent, they are denominated in dollars.

Check out Mortgage Recast Calculator (https://www.free-online-calculator-use.com/mortgage-recast-calculator.html)

Consider this situation, you have a 4.5% mortgage, paying 2000 per month.

Scenario 1: You have 50,000 at the point when you have 250K in principle remaining (169 payments remaining). You put that 50K into the loan and have it recast. You save 17,590 in interest (I don't see details on his site, but I assume this is in current dollars and not discounted)

Scenario 2: You have 50,000 at the point when there is 85K left in principle (47 payments remaining). This time when you recast the loan, you save $4,525.85 in interest.

Yes, the rates of interest you may save are the same. But the actual dollar amount is different.

The question still revolves around what else you could do with that 50K, and the rest of the borrower's situation.

[AngryScientist]

I'll reiterate: IME it's better to have the ability to pay off your mortgage any time, than have a paid off mortgage.



agreed. assuming you have a low interest mortgage rate like almost everyone does, i'll take the bird in the hand, as a hedge against the future.

IMO

[quickfeet]

Personal story time: I was a mortgage broker thru the late 90s and into the early 2000s. I was making pretty good $ and bought a condo in Sandy Eggo. I was living pretty well on my own...

Then the housing market crashed and I went from hero to zero in the space of a few months. Burned thru all my investments, savings, and even borrowed $ from Mom and Dad to save the house. Finally admitted defeat and sold.

...luckily, I sold right before the BIG crash in values, so I made $ which supported me for a bit. I had equity in my walls, but couldn't touch it 'cause it was wrapped up tight. Couldn't get a loan because I couldn't qualify $$ wise any more. No equity because values weren't there any more. The only alternative was selling... Then I didn't have a place to live!

Nope. Sticking your $$ in your walls doesn't seem smart to me any more. That's Depression-era thinking in a new economy. There's no such thing as a pension. Back when there *were* pensions, it made sense to pay off the house early so you could afford to live on the pension and SS. ...but old advice dies hard... Even if it isn't nearly as relative as it once was.

It's up to you to fund retirement. So... that means the longer you can have your money growing for you, the bigger it'll grow. IOW the power of compound interest.

I'll reiterate: IME it's better to have the ability to pay off your mortgage any time, than have a paid off mortgage.

M

While I totally understand this was a hard situation, how much less could you have lived off of with no debt remaining? I view having a paid off home as options. If I don’t need to have money each month for a car payment or rent/mortgage, I could work at McDonald’s and make enough money to live off for a bit.

[54ny77]

interesting thread.

somewhere along the way the idea that EVERYONE should be able own a home became part of the nationwide lexicon, as well as a shift in federal policy to support that idea. technically, it really expanded under clinton (bill) when fannie was permitted to go sideways, relatively speaking.

equally bad was the notion that a home should be treated as an investment like a stock. it's a friggin' HOME for crying out loud. that notion really kicked into high gear in the late 90's, esp. with the advent of all the "get rich" or "house flip" t.v. shows and infomercials. some of the smarter guys in the room realized the absurdity of that notion and created mechanisms to short it, ultimately to the detriment of millions of people as well as multitudes of institutions.

long story short, many people should not own real estate for their primary home, for a variety of reasons. yes it's a forced savings way to build wealth. until is isn't.

ain't nothing wrong with renting, esp with limitations on tax deductions.

over a very long time, the real rate of return on one's HOME should exceed that of treasuries by some nominal amount. and on commercial, it should yield the appropriate cap rate. that's only my opinion, of course. many market realities are proving me very wrong....:rolleyes:

[Marc40a]

I’m not an advisor but I work in the field and stare at the markets on a screen all day. Some thoughts:

When the market is hitting all time highs, everybody thinks they’re a genius. “Just buy a mutual fund, buy tech, buy gold, etc...” those are the people that get routed when markets inevitably turn and they always do. A good rule of thumb is to not put any money that you’re going to want or need within the next 5 years in the market.. If you do, you’re accepting risk. **** happens.

Someone stated that your mortgage interest is tax deductible. It is and it isn’t. What a lot of people are going to find out this tax year is that they’re no longer itemizing deductions. Example: John and Mary pay 9k in property taxes and 9k in mortgage interest. The standard deduction is now 24k for a married couple. They’re not deducting that mortgage interest because the standard deduction is higher. Let’s say they paid 16k in property taxes... still not itemizing because the deductibility of property taxes is now capped at 10k

Because it’s not deducted, a 4% mortgage isn’t a tax adjusted ~2.8% anymore, it’s a true 4%. So what do you have to earn in the stock market to meet or beat that consistent 4% erosion of wealth? 6-7% for short term gains because you would have to pay fed and state taxes on them. 5.5% for long term gains because they’re taxed at a lower rate. If the historical rate of return for the market is ~7%, are you willing to accept that risk for a percent or two?

To the people saying that you might be limiting access to cash or borrowing by sinking money into the house. That’s true, but the whole point is to NOT be borrowing. Stop the madness. Aim for, in no particular order, no car loans, no credit card debt, no mortgage, 6 months cash in an emergency fund, and maxing your 401k contributions (currently 18.5k per year)

Now for the original poster, it looks like your mortgage rate is lower than 4% and we have no idea about the rest of your financial picture. Maybe that 50k takes care of your 6 month cushion, and allows you put a full 18.5k into your 401k this year. If so, there’s your answer.

Also, generally speaking, as I understand it, the shorter the remainder of the loan, the less it makes sense to refinance because of the costs associated with doing so.

[Marc40a]

...Not very many people got rich borrowing money to make more money.

So true.

To those who think otherwise, you know the Art of the Deal is fiction, right?

[Ken Robb]

I’m not an advisor but I work in the field and stare at the markets on a screen all day. Some thoughts:

When the market is hitting all time highs, everybody thinks they’re a genius. “Just buy a mutual fund, buy tech, buy gold, etc...” those are the people that get routed when markets inevitably turn and they always do. A good rule of thumb is to not put any money that you’re going to want or need within the next 5 years in the market.. If you do, you’re accepting risk. **** happens.

Someone stated that your mortgage interest is tax deductible. It is and it isn’t. What a lot of people are going to find out this tax year is that they’re no longer itemizing deductions. Example: John and Mary pay 9k in property taxes and 9k in mortgage interest. The standard deduction is now 24k for a married couple. They’re not deducting that mortgage interest because the standard deduction is higher. Let’s say they paid 16k in property taxes... still not itemizing because the deductibility of property taxes is now capped at 10k

Because it’s not deducted, a 4% mortgage isn’t a tax adjusted ~2.8% anymore, it’s a true 4%. So what do you have to earn in the stock market to meet or beat that consistent 4% erosion of wealth? 6-7% for short term gains because you would have to pay fed and state taxes on them. 5.5% for long term gains because they’re taxed at a lower rate. If the historical rate of return for the market is ~7%, are you willing to accept that risk for a percent or two?

To the people saying that you might be limiting access to cash or borrowing by sinking money into the house. That’s true, but the whole point is to NOT be borrowing. Stop the madness. Aim for, in no particular order, no car loans, no credit card debt, no mortgage, 6 months cash in an emergency fund, and maxing your 401k contributions (currently 18.5k per year)

Now for the original poster, it looks like your mortgage rate is lower than 4% and we have no idea about the rest of your financial picture. Maybe that 50k takes care of your 6 month cushion, and allows you put a full 18.5k into your 401k this year. If so, there’s your answer.

Also, generally speaking, as I understand it, the shorter the remainder of the loan, the less it makes sense to refinance because of the costs associated with doing so.

Good info for thought here. My wife and I just signed our returns for 2017 taxes today and were discussing what a very different return we will have for 2018 due to changes in the tax code.

[joosttx]

. Not very many people got rich borrowing money to make more money.

I spat my water reading this. This is so untrue. Perhaps you should written, “not very many people got rich borrowing to pretend to be rich”.

Banking exists for that very reason.... to lend money for others to make money.

[Marc40a]

I spat my water reading this. This is so untrue. Perhaps you should written, “not very many people got rich borrowing to pretend to be rich”.

Banking exists for that very reason.... to lend money for others to make money.

You have a point, borrowing isn’t intrinsically bad, but let’s put it this way, every bankruptcy, without exception, started with it.

[quickfeet]

Banking exists for that very reason.... to lend money for others to have the chance to make money.

Fixed it for you. I am risk averse, I would rather live a little more simply than lose it all attempting to build wealth outside a pace that I am comfortable with.

[joosttx]

Fixed it for you. I am risk averse, I would rather live a little more simply than lose it all attempting to build wealth outside a pace that I am comfortable with.

Got to hate it when people are given a chance to achieve their dreams. :)

But seriously I’m just know your statement I quoted is not true and I think it is important to point that out.

I’m done. Sorry for the drift. Great thread

[54ny77]

It's all fun & games when you're levered 100:1 so as to make more money on borrowed money....and sometimes on borrowed fake money created outta thin air (e.g. synthetic).

Until it isn't.

:p

[saab2000]

I’m not an advisor but I work in the field and stare at the markets on a screen all day. Some thoughts:

When the market is hitting all time highs, everybody thinks they’re a genius. “Just buy a mutual fund, buy tech, buy gold, etc...” those are the people that get routed when markets inevitably turn and they always do. A good rule of thumb is to not put any money that you’re going to want or need within the next 5 years in the market.. If you do, you’re accepting risk. **** happens.

Someone stated that your mortgage interest is tax deductible. It is and it isn’t. What a lot of people are going to find out this tax year is that they’re no longer itemizing deductions. Example: John and Mary pay 9k in property taxes and 9k in mortgage interest. The standard deduction is now 24k for a married couple. They’re not deducting that mortgage interest because the standard deduction is higher. Let’s say they paid 16k in property taxes... still not itemizing because the deductibility of property taxes is now capped at 10k

Because it’s not deducted, a 4% mortgage isn’t a tax adjusted ~2.8% anymore, it’s a true 4%. So what do you have to earn in the stock market to meet or beat that consistent 4% erosion of wealth? 6-7% for short term gains because you would have to pay fed and state taxes on them. 5.5% for long term gains because they’re taxed at a lower rate. If the historical rate of return for the market is ~7%, are you willing to accept that risk for a percent or two?

To the people saying that you might be limiting access to cash or borrowing by sinking money into the house. That’s true, but the whole point is to NOT be borrowing. Stop the madness. Aim for, in no particular order, no car loans, no credit card debt, no mortgage, 6 months cash in an emergency fund, and maxing your 401k contributions (currently 18.5k per year)

Now for the original poster, it looks like your mortgage rate is lower than 4% and we have no idea about the rest of your financial picture. Maybe that 50k takes care of your 6 month cushion, and allows you put a full 18.5k into your 401k this year. If so, there’s your answer.

Also, generally speaking, as I understand it, the shorter the remainder of the loan, the less it makes sense to refinance because of the costs associated with doing so.

This is superb analysis and I agree completely with the highlighted area. A point of note. Your 401k contribution limit of $18.5k applies to people under 50. Aged 50 and over it's $24.5k and this is not counting a Roth IRA, which is $5.5k or $6.5k, respectively. The overwhelming majority of Americans aren't saving enough towards retirement and I'd bet many (most?) people on this forum are over 50.

Anyway, just wanted to point this out but I agree completely about your debt-free comments.

[SPOKE]

I can tell you that being debt free can change your attitude about living your life in general. It even changes your relationship with work. Being debt free really helps you sleep well.....paying off your house is usually the biggest step to achieving this goal. As others have said,build an emergency fund, payoff all the cards, vehicles, contribute to your 401ks & Roth, and get the house paid for.

[Ralph]

As an old retired guy....with no job....and living off investments and SS, I keep 5 years worth of extra funds (above what we normally need) in a Vanguard money market fund (currently yielding a little over 2%). I figure most recessions and unexpected national events usually work themselves out in 5 years. This allows me to be fully invested with the rest of my assets (not necessarily all in stocks or stock funds).

When the terrorists attacked NY in Sept 01, the stock market was closed for 3-4 days, and when it reopened....it immediately dropped about 25%. In about 15 minutes I lost about 1/4 of my retirement investments not in cash (my fault to be so heavily invested in equities). That hurt me....caused my family to have to tighten our belts way more than we wanted to....I had just retired in 98. And I had the suggested 6 months cash reserves....it's wasn't near enough to maintain the life style we had. It took a while to recover from that, and I did not want to spend from assets that were down in value.

So we vowed to never allow ourselves to be put in that position again. Now if we want to take a nice trip...or buy a new car if we need one....in the middle of hard times....can do it....no worries about what is going on in economy. These kind of unexpected events can happen at any time. As a matter of fact....I fully expect the next scary economic event to be something no one is thinking about now. Something totally unexpected. So I'm a fan of large emergency funds. Has everyone forgotten 10 years ago? or 2001?

[einreb]

recast vs lump sum towards principal

Title about sums it up. Which option makes more sense when you have say $50k to put towards loan
Thanks

In the four pages of responses I don't think anyone answered your question?

My take is this...

#1 Just lump sum towards principal makes the most sense if you are not worried at all about reducing your monthly minimum mortgage payment.

#2 Lump sum then recast makes sense if you'd like the option of having a lower payment. However there will likely be a 'recast' fee (ours was $250 if I recall).

i.e. the actual interest savings/payoff date would be almost a wash between the two if you lump sum or lump sum/recast but continue paying your mortgage at the 'old' amount. The recast fee buys you the option of making a lower monthly payment and pushing out the term of the loan to the original length.

YMMV

[zap]

edit

My wife and I just signed our returns for 2017 taxes today and were discussing what a very different return we will have for 2018 due to changes in the tax code.

I fear many will get caught out by tax changes this year. Also note that personal exemption has been eliminated for 2018-25.

[Gummee]

While I totally understand this was a hard situation, how much less could you have lived off of with no debt remaining? I view having a paid off home as options. If I don’t need to have money each month for a car payment or rent/mortgage, I could work at McDonald’s and make enough money to live off for a bit.

I'd bought the house less than 2 years earlier. Wasn't an option. I also went from making not quite $100k/yr to zero in the space of a few months. I had reserves. I had savings. Used em all up hanging on to the house and the car.

The other lesson learned: if you start missing payments, time to sell BEFORE there's a much bigger problem.

For a while afterwards, I couldn't even get Circle K to give me a job. ...and I can even count change!

M

edited to add: I am debt free these days. I'm making peanuts comparatively, but yet, living relatively well. There's something to be said for debt free