Author Topic: Paydown mortgage & reamortize?  (Read 813 times)

BCherie

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Paydown mortgage & reamortize?
« on: July 14, 2017, 12:10:58 PM »
Hoping for some advice on whether my plan makes sense, or what the downsides may be that I haven't thought of.

For starters: we are maxing tax-advantaged savings, and have a fully-funded emergency fund (1 year expenses) + a HELOC with $40k available to draw and nothing currently drawn.  We have a reasonably high monthly mortgage payment (P&I) that is exacerbated by fairly expensive (and rising) local taxes ($750/mo+) and insurance ($150/mo). We are looking to minimize our monthly expenses in hopes of achieving FIRE, or at least semi-FIRE (wherein we can scale back at work, go part time, start our own business, etc. -- and save less, without actually dipping into savings) in the near future. We have a low, <4% interest rate on our mortgage.

If we prepay 20% of our mortgage balance, our mortgage company will let us reamortize the mortgage. In other words, for a $200-300 fee, they will recalculate our monthly payments to get us back on a 30 year pay off schedule (from the original mortgage date -- not a refi where the life of the loan is extended), effectively lowering our monthly mortgage bill.  Based on our original balance, prepaying 20% would mean close to $80,000. My calculations suggest that if we prepaid that much today in a lump sum, our monthly bill would go down by about $500/month. By my math, we'd need $150,000 in the market to yield $500/month in perpetuity (though admittedly we don't need it in perpetuity -- just for the next 25 years).

My question: Is it irrational to put that $80,000 into my mortgage rather than the market? Assume I would not have to sell anything to get that $80k and so wouldn't take a big tax hit -- for example, if I could save it, or get it as a bonus, etc.  My logic says that $80k should net $3200/year in the market, so if I can reduce my monthly P&I payments by at least $300/month, then this is a logical decision. Am I overlooking something?

frugaliknowit

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Re: Paydown mortgage & reamortize?
« Reply #1 on: July 14, 2017, 01:29:07 PM »
My question: Is it irrational to put that $80,000 into my mortgage rather than the market? Assume I would not have to sell anything to get that $80k and so wouldn't take a big tax hit -- for example, if I could save it, or get it as a bonus, etc.  My logic says that $80k should net $3200/year in the market, so if I can reduce my monthly P&I payments by at least $300/month, then this is a logical decision. Am I overlooking something?

No, it is not irrational.  However, reducing your mortgage debt by $80,000 (a risk free investment) is not comparable to having $80,000 invested in the market (a relatively high risk investment).  In other words, not "apples to apples".  It's like comparing a 4% U.S. government bond to a wide range of possible returns on equity investments (depends on what happens over the period of time you own the equities...).

The reduction of your monthly payment as a result of you pre-paying principal and your bank "recasting" (the $300 per month) is about cashflow, not rate of return.  The return is the amount of interest you save over the remaining life of the mortgage.

If your goal is to have better cashflow and/or increase your return on your personal equity, maybe you should consider downsizing your home and investing the proceeds?