Paying off mortgage early..

[EEinNJ]

First of all, don't listen to Suze Orman, she's cracked. Her advice is good for the financially dysfunctional, but you sound like you're in good shape.

Paying extra principal is great, but let me tell you a better way than doing it piecemeal. Save the money instead of putting it in the mortgage check. Then, when you have at least 10,000, tell the mortgage holder you want to make a principal payment and "recast" the loan. This will re-amortize your loan over the remaining term at the same rate, and only requires a small processing fee. Your payment will go down, and you'll be paying more principal and less interest with each payment.
While you're saving, think of it as an emergency fund for your house. If your life changes, and it probably will, you may need the money to sell & buy a new place.

[ScrimpAndSave]

EEinNJ,

Thank you for the advice! When/If I send this $10,000 check to "recast" the loan, does all of the $10,000 go toward the principal?

Thanks!

[creditcardfree]

Paying extra principal is great, but let me tell you a better way than doing it piecemeal. Save the money instead of putting it in the mortgage check. Then, when you have at least 10,000, tell the mortgage holder you want to make a principal payment and "recast" the loan. This will re-amortize your loan over the remaining term at the same rate, and only requires a small processing fee. Your payment will go down, and you'll be paying more principal and less interest with each payment.

Not a bad idea. But, check with lender before proceeding with this plan, to make sure they will actually do this and for what amount.

[disneysteve]

First of all, don't listen to Suze Orman, she's cracked. Her advice is good for the financially dysfunctional, but you sound like you're in good shape.

Paying extra principal is great, but let me tell you a better way than doing it piecemeal. Save the money instead of putting it in the mortgage check. Then, when you have at least 10,000, tell the mortgage holder you want to make a principal payment and "recast" the loan. This will re-amortize your loan over the remaining term at the same rate, and only requires a small processing fee. Your payment will go down, and you'll be paying more principal and less interest with each payment.

I have to disagree with the Suze Orman comment. I think her advice is financially sound. She does tend to focus on those having trouble to help get them on the right track, but what she says is good, solid advice.

I've never heard about recasting the loan in the way you describe. Is that something that is at the discretion of the lender or do they have to do that? What is the typical fee they charge for doing that? There is no benefit to the lender since they are sacrificing interest so I'm not sure why they would agree to a deal like that.

[creditcardfree]

I googled recasting loans, it is definitely up to the lender to approve such a change. It appears it may most often happen with negative amortization, especially on ARM's.

[EEinNJ]

I have recast plain-old conventional mortgages on 2 different home with 2 different lenders. Last time I did it, with Chase Home Finance, it cost $250, it just took a couple of months to get to the right desk and do the paperwork. I could not say whether all lenders will do this, though part of the terms in mortgages is whether or not you can pre-pay interest without penalty.

I admit bashing Suze a bit, because once you get past the basics and the emotional self-defeating behavior, everybody's situation and priorities are different. Blanket advise like "Don't pay off your mortgage unless you're staying there forever" is one-sided, and in this case, confused the OP.

I think most of the advise here is as good or better than Suze Orman's!

[wincrasher]

Don't know why you'd want to re-cast unless you want a lower payment for the rest of the term. Kinda seems contrary to the whole idea of paying the mortgage down early.

Almost all mortagages allow you to pay down principal at any time and will result in savings on interest charges. You don't need to re-cast to do that. You just need to verify that your extra payment is going toward principal and not pre-paying payments.

[simpletron]

First of all, don't listen to Suze Orman, she's cracked. Her advice is good for the financially dysfunctional, but you sound like you're in good shape.

Paying extra principal is great, but let me tell you a better way than doing it piecemeal. Save the money instead of putting it in the mortgage check. Then, when you have at least 10,000, tell the mortgage holder you want to make a principal payment and "recast" the loan. This will re-amortize your loan over the remaining term at the same rate, and only requires a small processing fee. Your payment will go down, and you'll be paying more principal and less interest with each payment.
While you're saving, think of it as an emergency fund for your house. If your life changes, and it probably will, you may need the money to sell & buy a new place.

recasting doesn't lower the interest amount you'll pay the next month because you still pay the same percentage of the outstanding balance. recasting actually lowers the percentage of the payment going to principle(lower payment, same interest = lower principle portion). recasting has the same effect as refinaincing to a longer term at the same interest rate. how much longer term is the same as how many years your prepayments have cut off. recasting is for people you have prepaid in the past, but now need/want a lower mortgage payment.(kids, job/income loss, spend/invest more,...)

would you buy a taxable bond/CD that has a fixed 5.35% interest rate that matures when you either sell the house or the mortgage is paid off(which ever comes first)? if the answer is yes, prepay the mortgage. if the answer is no, put your money elsewhere. personally I don't see it as a great deal because there are so many better options out there, but the more conservative investor would say it is a good deal because very few fixed interest bonds are that high right now.

[ScrimpAndSave]

Simpltron! I love the taxable bond/CD idea...thanks!

[EEinNJ]

OK, there seems to be some misunderstanding here, but it's important enough to explain.
Wincrasher, the savings of simply pre-paying principal only appears at the end of the loan, so you would not see any benefit until many years along in the loan. This is because with loan amortization most of the principal is paid at the end.
Simpletron, I don't think you understand how this works. The end date is the same, you are not lengthening the term. Overall, you will also pay less interest. Because of the new amortization schedule, for the first couple of years, you will pay less principle as part of monthly P&I, but your payment will be lower, you could easily add that on.
Here's the math:
Assume 100,000 for 30 yr.s at 5%
Payment 536.82
after 5 years: balance 91828.73
1st payment P&I I: 416.67 P: 120.15
60th payment P&I I: 383 P: 154
Recast after 5 years with 10,000 prepayment:
new balance: 81828.73 remaining term: 25 at 5%
new payment: 478.36
1rts mt I&P 341 137
25th pmt 326 152

Now if you know an investment of 10,000 that will yield 7% risk-free (saving $59x12 months/10,000) please share!

[sandrark]

Sandi, investing the money rather than making extra principal payments does not necessarily mean getting into the stock market. You could put the money in a variety of investments - stocks, bonds, treasury bills, CDs, etc.

True.

Personally, for someone young and just starting out like the OP, I'd rather see them building accessible savings.

Agreed, but she said this plan would happen AFTER she had 6 months of expenses saved, and accessible. I think that's probably sufficient. She also only talked about her mortgage - she did not say explicitly that all other debt is paid off. If she has debt other than the mortgage, she should be focussed on getting it paid off.

I'm 44 and we've been in our home for 15 years and we just started making extra payments a few months ago (and we do plan to stay here forever or at least until retirement).

So I've vote for investing outside of the mortgage.

Agreed - I'm 43, in our house for 17 years, and we're making extra payments now because we got everything else done. So we're on the same page, I think.

My point is that she says only that she's maxing out a Roth - as a teacher, she probably has access to a 403(b) as well, and she does NOT say whether the Roth is 15% of her gross pay. My recommendation is that the 403(b) is a better idea than taxable accounts right now - she has the savings account, PLUS she can withdraw her Roth CONTRIBUTIONS without penalty if she needed more than the EF contained.

Once she hits 15% in retirement, THEN she should consider pre-paying the mortgage. IMO.

Sandi

[simpletron]

for EEinNJ

take the 100K at 5% 30 year mortgage in your example. monthly payments is 536.82. you pay normally for 60 months and then prepay 10K. your 61st payment is still 536.82 where 340.95 is interest and 195.87 is principle. if you recast, your 61st payment drops to 478.36 where 340.95 is interest and 137.41 is principle. notice there is no change in the amount of interest due and all of the savings is from being allow to pay less principle. going forward, all future payments(after 61st) on the original schedule will have less interest than the corresponding recasted payment because of the extra principle being paid and to top it off that there are 57 less payments on the original.

in the example above, by not recasting you pay 72376.49 in interest over 25 years and 3 months and then have 1 month of 280.32 and 57 months of 536.68 in free cash flow. if you do recast, you pay 85718.08 in interest over the 30 year life of the loan and have 300 months of 58.46 in free cash flow. for you to come out ahead, you will need to invest the free cash flow at higher than 5%, but if knew you were going to do that you should of invested the 10K prepay instead because that would have put you even farther ahead. the main reason to recast is because you need additional cash flow and/or lower minium cost now and possible reasons for this include job loss, variable income, kids, retiring/working less, or just wanting to spend more.

at the point of recasting, you changed your 81828.73 at 5% 20 year 3 month mortgage into a 81828.73 at 5% 25 year mortgage, because it would of taken 20 years and 3 months to pay off if you didn't recast. same effect as refinancing to a longer term...(just not longer than the original term)

and about the 7% risk-free return, it is really only 5% because you only have to generate 58.46 per month for 25 years and not indefinitely. 10K earning 5%/year paying out 58.46/month for 25 years equals 0.

[FrugalFish]

EEinNJ, I'm a little confused. If you were to make a lump sum principal payment of $10K at 5 years on that theoretical loan, it would knock almost 5 years off the life of the loan, leaving you with only another 20 years of payments. By recasting you are turning around and making a now 20 year loan into a 25 year loan. A 30 year loan does not have to have a 30 year end date. Am I missing something here?

[creditcardfree]

Frugal Fish, the loan is refigured or amortized with the new balance amount, but using the same original end date of 25 years. When you figure what the P&I on a new loan would be it changes the payment amount (lower), as well as which portions of the payment go to principal and interest.

In my opinion, this is not something the average consumer would want or need to do, especially, if they have $10K to throw at a loan at once. When I googled recast loans I read this is often done with ARM's...at the 61st month, after 5 years.

[disneysteve]

My point is that she says only that she's maxing out a Roth - as a teacher, she probably has access to a 403(b) as well, and she does NOT say whether the Roth is 15% of her gross pay. My recommendation is that the 403(b) is a better idea than taxable accounts right now - she has the savings account, PLUS she can withdraw her Roth CONTRIBUTIONS without penalty if she needed more than the EF contained.

Once she hits 15% in retirement, THEN she should consider pre-paying the mortgage. IMO.

Actually, in another thread today she posted that she has about 17% going into retirement accounts between her pension plan and Roth.

Still, I don't think she should be tying up her money in her home equity at this point in her life. Yes, she's got a decent EF, but there's more to life than an EF. What about a new car fund, vacation money, wedding money, etc? I'd rather see the money in a more liquid account at this stage of life, but I think that is just a judgement call. Neither way is really right or wrong.