Author Topic: Should I recast mortgage? How much?  (Read 5229 times)

BlueHouse

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Should I recast mortgage? How much?
« on: April 22, 2015, 11:13:54 AM »
Please help me decide if I should recast and if so, is the plan below optimal?
I understand the probability that the money will earn more if I stick to investments, but I feel I'm leveraged too much and emotionally, it's a lot of stress on me as a single earner.  So I'm not asking for a generic analysis of "should I pay off my mortgage or invest".  Instead, I'm asking what YOU would do if you were in MY shoes.  (probably okay to skip the answer that most would not have bought a house this expensive, but feel free to facepunch if you must.)

I currently have two mortgages
1.  Primary residence:  560K @ 3.875.  Home value ~ 900-950K
2.  Rental:  250K @ 3.0% ARM (It just reset.  had been 2.8% for a few years.  cannot increase more than 2%/year).  Home value ~ $310-340K (I paid $350k)

I am cash flow negative on the rental and want to sell it within 3 years.  Refinancing the rental would immediately increase the interest rate by 1 or 2% (guessing) due to status as investment property, so I haven't put much consideration there.  I'm not a natural landlord, and want to get out of the business before I lose even more money (but I want to wait for the optimal time to sell, which I believe is 2018, when a new transportation hub will open a few blocks from the condo.)

My primary residence is in a HCOL area.  It's 5 miles from where I currently work, in a fantastic and growing neighborhood.   I have no plans to move from this house.  Problem is, my house payments are large and scary.  Assume income is not a problem now, but could will very likely drop by half or more sometime between 6 months or 6 years.  So I'm thinking of recasting the mortgage on my primary residence to a much smaller amount, leaving me with a low monthly payment, that I wouldn't worry about paying, even if I had to go "get a real job". 

The facts:
Recast cost:  about $250.
my age:  47
mortgage principal remaining:  $560K @ 3.875%
term remaining:  27 years
monthly PITI:  $3500.  I've been paying an extra $1000/month toward mortgage principal so that even if I do nothing else, I'll get the mortgage paid off by age 63

My plan:
recast the loan using:
$70k from sinking fund, closing the sinking fund (remaining balance = 0).
$30k from cash balance, leaving the rest in high-yield savings/CD mix (remaining balance = $95k)
$150k from taxable investments,(remaining balance = $180k)

This will decrease mortgage principal balance to 310k, with a monthly PITI payment of $2250.  I'd be much more comfortable with this amount, because I wouldn't have to stress every.single.day about "what if <worst case likely scenario>" anymore.

go forward plan: Pay minimum on mortgage (to age 74), all funds that would have gone to paying down mortgage instead go into my low-fee index funds in a taxable account.  (Already taking advantage of most tax-advantaged savings). 

Does the plan sound reasonable?  Am I overlooking anything?  Is there a better way?  Other than reducing short-term gains, is there any other tax implication to be aware of?  Please pick this plan apart so I know I've considered all options.  Many thanks for reading and responding. 

Edited: See strikethrough above. I'm an independent consultant exploiting a situation where qualified resources are scarce.  But this is changing, quickly.  I haven't changed my rates in 5 years and I assume my next position will be much more competitive.  When that happens, my income will decrease. 
« Last Edit: April 22, 2015, 12:08:49 PM by BlueHouse »

AJ

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Re: Should I recast mortgage? How much?
« Reply #1 on: April 22, 2015, 11:22:48 AM »
With 27 years still remaining on your mortgage, and presumably no decrease to the interest rate, I don't think I would recast if I were in your shoes.

You have $250k cash that you are earmarking for this. If the "worst case scenario" did indeed happen, you could float the payment on that savings for almost 7 years! That is more than enough time to get your bearings and find a new job or sell the place (or whatever "worst case scenario" you had in mind). I would keep that $250k invested and keep the mortgage. That gives you more flexibility.

MDM

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Re: Should I recast mortgage? How much?
« Reply #2 on: April 22, 2015, 11:38:00 AM »
With 27 years still remaining on your mortgage, and presumably no decrease to the interest rate, I don't think I would recast if I were in your shoes.

You have $250k cash that you are earmarking for this. If the "worst case scenario" did indeed happen, you could float the payment on that savings for almost 7 years! That is more than enough time to get your bearings and find a new job or sell the place (or whatever "worst case scenario" you had in mind). I would keep that $250k invested and keep the mortgage. That gives you more flexibility.

+1.  Good summary.

Might be different if you were asking about paying off the entire mortgage, but if you are still paying then having your money in more liquid investments makes more sense (to me - but that's what you asked...).

BlueHouse

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Re: Should I recast mortgage? How much?
« Reply #3 on: April 22, 2015, 12:00:03 PM »
With 27 years still remaining on your mortgage, and presumably no decrease to the interest rate, I don't think I would recast if I were in your shoes.

You have $250k cash that you are earmarking for this. If the "worst case scenario" did indeed happen, you could float the payment on that savings for almost 7 years! That is more than enough time to get your bearings and find a new job or sell the place (or whatever "worst case scenario" you had in mind). I would keep that $250k invested and keep the mortgage. That gives you more flexibility.

Okay. good point there.  Would you change your answer if the "most likely scenario" is that I will earn less than half of my current income sometime within the next 6 years with no likely way to ever make as much again? 

Might be different if you were asking about paying off the entire mortgage, but if you are still paying then having your money in more liquid investments makes more sense (to me - but that's what you asked...).
Please explain.  I thought recasting would be a more liquid option than paying off early (either in whole or piecemeal) and would reduce my risk when my income drops precipitously.  This will leave me leveraged at $350k (decreasing with time), but will not put additional money at risk of loss when the time comes that my income drops.  I think I could pay off the entire mortgage in 5 or 6 years and be very happy emotionally, but the calculators tell me this isn't the best move financially.

MDM

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Re: Should I recast mortgage? How much?
« Reply #4 on: April 22, 2015, 12:15:20 PM »
Please explain.  I thought recasting would be a more liquid option than paying off early (either in whole or piecemeal) and would reduce my risk when my income drops precipitously.
Yes, recasting is a more liquid option than paying off early, because money tied up in a house is illiquid while money invested in index funds is very liquid.

Once the house is paid, however, you don't have to worry about losing it due to lack of ability to pay for it (other than ongoing property taxes).

Quote
I think I could pay off the entire mortgage in 5 or 6 years and be very happy emotionally, but the calculators tell me this isn't the best move financially.
A perfect summary of the usual debate!

nobody123

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Re: Should I recast mortgage? How much?
« Reply #5 on: April 22, 2015, 12:31:38 PM »
2.  Rental:  250K @ 3.0% ARM (It just reset.  had been 2.8% for a few years.  cannot increase more than 2%/year).  Home value ~ $310-340K (I paid $350k)

I am cash flow negative on the rental and want to sell it within 3 years.  Refinancing the rental would immediately increase the interest rate by 1 or 2% (guessing) due to status as investment property, so I haven't put much consideration there.  I'm not a natural landlord, and want to get out of the business before I lose even more money (but I want to wait for the optimal time to sell, which I believe is 2018, when a new transportation hub will open a few blocks from the condo.)


Have you run the numbers on using that $250K to pay off the mortgage on the rental, which I would assume would then become cash flow positive, and use that income to "subsidize" your mortgage on your home for a few years until you sell it?  Then either use the proceeds from the sale to replenish your investments or to recast your main residence.  You can always hire a management company to deal with the landlord stuff, and maybe the rental wouldn't be so unappealing to you.  Maybe get a LOC against the rental so you could use some of that equity in case of an emergency.  I don't know if the numbers will make sense, but it might be worth looking at.

Gone Fishing

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Re: Should I recast mortgage? How much?
« Reply #6 on: April 22, 2015, 02:06:58 PM »
After you make the proposed paydown, how much liquidity would you have left? 

Will you ultimately have to sell the house to retire?

I am assuming when you say recast you mean refinance.  If you haven't already, check with your current mortgage holder, some will allow for reamortization after a principle paydown for a fee which may amount to much less than the cost to refinance.  If they offer this, you would already have some "credit" towards a lower payment due to your extra monthly payments.

That said, I wouldn't do anything with it. Cash(liquidity) is king if something bad happens.   

MDM

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Re: Should I recast mortgage? How much?
« Reply #7 on: April 22, 2015, 02:18:57 PM »
I am assuming when you say recast you mean refinance.
Possibly, although they are two separate things: http://www.moneycrashers.com/recasting-mortgage-loan/

Gone Fishing

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Re: Should I recast mortgage? How much?
« Reply #8 on: April 22, 2015, 02:25:43 PM »
I am assuming when you say recast you mean refinance.
Possibly, although they are two separate things: http://www.moneycrashers.com/recasting-mortgage-loan/

Interesting, I have never heard the word used that way.  In that case the that portion of my post is redundant, please ignore.  You learn something new everyday.

thd7t

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Re: Should I recast mortgage? How much?
« Reply #9 on: April 22, 2015, 02:25:57 PM »
After you make the proposed paydown, how much liquidity would you have left? 

Will you ultimately have to sell the house to retire?

I am assuming when you say recast you mean refinance.  If you haven't already, check with your current mortgage holder, some will allow for reamortization after a principle paydown for a fee which may amount to much less than the cost to refinance.  If they offer this, you would already have some "credit" towards a lower payment due to your extra monthly payments.

That said, I wouldn't do anything with it. Cash(liquidity) is king if something bad happens.   
I've bolded the part where you describe recasting.  It usually requires a substantial principal payment and a small ($200ish) fee.  Then the mortgage is reamortized to its original date.  It could be useful if OP doesn't expect consistent cash flow later as it reduces expenses.
EDIT: sorry for the doubly redundant post

BlueHouse

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Re: Should I recast mortgage? How much?
« Reply #10 on: April 23, 2015, 08:32:25 AM »
Thanks for the comments.  I'll answer questions below, and I'll explain my thoughts on my current status.  You know all of those people who lost their homes and savings and livelihoods during the GFC and remember the comments of "well, they bought a house they couldn't afford".  That's where I feel I am, minus the crises.  My payment is so high, that a regular W-2 job in my industry could not afford it without major sacrifice.  I suspect I'm having a hard time understanding how to translate my growing investment accounts into a monthly cash payment that would cover the mortgage if needed.  And I just hate the idea of withdrawing money from an investment account for a regular and recurring expense while I'm still in the accumulation stage.  So my goal is to use available cash to "buy down" the risk of unaffordable house payments at a later date.  The impact if the worst case happens is so unappealing to me that I am willing to forgo the opportunity of optimal returns of investing that money.  Now I want to be sure I have a good understanding of the optimal returns of investing the money vs. paying down the mortgage.  At its simplest, it's the difference between market returns and my interest rate * $ amount, right? 
So let's say I might lose $300k * (.08-.03875) = $12,375.  *27 years = 334K
But I would immediately start investing more in my investment accounts to match the monthly difference in payments, which would be 1200*12months *27 months * .08 = 31K. Plus the savingsin the mortgage interest which would be roughly 180k=211K.  So if the market plays out at 8% over the next 27 years, then I'm potentially walking away from $113K over 27 years or $4.2K per year.  So now I have to decide whether it's worth it for me to pay $4K per year to reduce the risk of losing my home.   

Am I looking at this correctly?   

After you make the proposed paydown, how much liquidity would you have left? 
200-250, depending on how much I pay down.  Plus a 401k w/500 that is growing at $53k/year (but only as long as I'm riding this gravy train)

Will you ultimately have to sell the house to retire?
 At this point, I hope to keep the house forever.   I would work longer to continue living here. 

For recast, I'm using this definition:
apply an additional sum of money to substantially reduce the unpaid principal balance of their loan and reamortize the balance, resulting in a substantially lower monthly payment.  I am considering throwing $300 - $350


Have you run the numbers on using that $250K to pay off the mortgage on the rental, which I would assume would then become cash flow positive, and use that income to "subsidize" your mortgage on your home for a few years until you sell it? 
I don't think the numbers work for that scenario.  And I need the expense of the mortgage interest to offset the income from the rental.

BlueHouse

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Re: Should I recast mortgage? How much?
« Reply #11 on: April 23, 2015, 10:21:54 AM »
Can't we just think of recasting as a portfolio re-allocation into a lower-risk (but completely predictable) ROI?  Not ideal in terms of diversification, but if I were to recast as described in the initial post, my portfolio would then look like:

Before recast
 Before    
 cash/CD    9%
 real estate    24%
 retirement stock    53%
 retirement bond    13%
Before recast    100%
   
 AFTER    
 cash/CD    7%
 real estate    49%
 retirement stock    35%
 retirement bond    9%
 with recast    100%





GetSmart

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Re: Should I recast mortgage? How much?
« Reply #12 on: April 23, 2015, 07:17:20 PM »
Is there any way of relocating to a smaller / less expensive place in the same neighborhood?  (If I recall correctly from a long ago post you have a fairly large house for one person? and no way of renting out a portion? )

Also - perhaps you should just be looking at the difference in principal and interest as taxes and insurance will more than likely go up not down.  Maybe it's also worth looking at the percentage of P&I to income in both scenarios.

And I just wanted to say that I completely understand your position.  I was in similar circumstances (although not to this amount - yikes!) several years ago - huge drop in income with expensive house, but managed to hang on by cutting all other expenses to the bone and keeping them there just because we got used to it :)  So as tempting as it may be, if I were in your shoes, I think I would not recast.


BlueHouse

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Re: Should I recast mortgage? How much?
« Reply #13 on: April 24, 2015, 05:13:38 AM »
Is there any way of relocating to a smaller / less expensive place in the same neighborhood?  (If I recall correctly from a long ago post you have a fairly large house for one person? and no way of renting out a portion? )
Can't get anything cheaper. I bought early enough when the neighborhood was still affordable. I could buy a condo for half the price, but the fees are enormous and my deal is better. Yes, I could always rent out a portion, but I don't want to do that unless I must. I do have frequent visitors and that's the main reason I got such a big house.

Quote
Also - perhaps you should just be looking at the difference in principal and interest as taxes and insurance will more than likely go up not down.  Maybe it's also worth looking at the percentage of P&I to income in both scenarios.
In the before and after scenarios above, I was showing the percent equity I have now vs what I would have if I were to recast. In calculations for payments and cash flow, I assumed taxes and insurance would remain the same.

Quote
And I just wanted to say that I completely understand your position.  I was in similar circumstances (although not to this amount - yikes!) several years ago - huge drop in income with expensive house, but managed to hang on by cutting all other expenses to the bone and keeping them there just because we got used to it :)  So as tempting as it may be, if I were in your shoes, I think I would not recast.
Good point. There is still an enormous amount of fat I can cut out of my average spend. I could probably trim another thousand a month if I cooked all meals and stopped with any processed food.

Problem still exists though. I'm an emotional wreck over these payments. Maybe they're not as big as I think?  Maybe I still could afford them when I fall off the gravy train?  No one else seems to think I'm in dire straits so maybe I'm just panicking for no reason. But I look at my spreadsheets multiple times every.single.day and I just want to stop worrying.  I also want to stop eating the shit sandwiches at work and only FI will get me there. I guess deep down I know I wouldn't be financially devastated. I could sell this place in a heartbeat for more than I owe if I needed to. I just love it here and don't want it to come to that.

Gone Fishing

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Re: Should I recast mortgage? How much?
« Reply #14 on: April 24, 2015, 03:27:50 PM »
WARNING-Facepunch coming!

Fact is that your house is really effing expensive and that is why you are worried about it. Short term it may make you feel better, but long term, no amount of asset shuffling will resolve that fact.   Any way you slice it, you are going to end up with $1mm+ tied up in a house that will cost you additional tens of thousands every year in taxes, utilities, maintainance, and insurance (BTW, what do you think this figure is?).  Just taking a wild guess, I would estimate that those costs alone would probably require a stache of over $500k just to support on an annual basis through retirement.   Between the opportunity cost of the home equity tied up (in terms of cash flow) and the annual cost, it would not supprise me if the house "costs" you over $100k a year in retirement income.  You will have to reconcile your concern over your continued income, your desire to quit eating shit sandwiches, and your desire to stay in a $1mm house.  Recasting your mortgage will not fix this.

This is what I might do in your situation:

Keep making the payments without any additonal principal paydown.  Invest all extra cash.  Ride the job out until the end.  Get a replacement job.  If new job is not sufficient to make mortgage, explore recasting using the "credit" from your previous principal paydown.  If new job is not sufficient to make the recast payment, put the house on the market and move to someplace less expensive.  Between the equity in your home and current savings you could probably retire at this point if you so desired.

Crazy wild card:

I don't know if it would work, and if it did, I am sure it is not the most financially optimal choice, but it may be worth exploring.  Do your homework, and a lot of it, on a reverse mortgage and see if it might help you make what you ultimately want (to stay in your house and have a comfortable retirement).  As you do your research, be aware that this arena could change at any moment.  Given the retirement "crisis", reverse mortgages will undoubtedly become more popular, however, as they do, the terms will probably get worse, and the restrictions tighter as there is a lot of opportuity for abuse.  BE CAREFUL.