Paying off mortgage early..

[swanson719]

I definitely agree that it always makes sense to pay off the mortgage unless you can find investment vehicles with a better return than what your interest rate is.

You might also look into municipal bonds right now too. California might not have the best credit rating at BBB, but because it is that low, they are paying one of the highest interest rates.

[LivingAlmostLarge]

There's a lot of extra savings in life. Marriage, travel, baby, car, etc.

[EEinNJ]

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?

Yes, you are. If you look at an amortization schedule, using the initial example I gave, at 28 years you still owe 12,236. So making a lump sum principal payment without re-amortizing would only knock off somewhat less than 2 years, not 5

[EEinNJ]

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.

Your figures are incorrect. If you put down 10K at 5 years without recasting, you still have about 23 years remaining to pay, and pay about $92.6K in interest instead of 93,255. With recasting, including both the first 5 years and the remaining 25, you pay 85717 in interest. If you save/apply the 59/month you save from recasting towards the principal, you would actually pay of the loan in about 27 years, or a year sooner than not recasting.

I verified this using an on-line amortization calculator, so feel free to check me.

[ScrimpAndSave]

Oops, I did forget to add that I will have no other debt.

Thanks again everyone.

[simpletron]

Yes, you are. If you look at an amortization schedule, using the initial example I gave, at 28 years you still owe 12,236. So making a lump sum principal payment without re-amortizing would only knock off somewhat less than 2 years, not 5

when looking at the amortization schedule you must apply the prepay at the month it is paid, not at the end. in this case we are paying at the 60th payment where the balance is 91828.73, then after 10K prepay is applied the balance goes to 81828.73. now we must go and find where in the table this balance occurs, which happens to be between 117th payment and 118th payment. so we saved between 57 and 58 payments or almost 5 years.

Your figures are incorrect. If you put down 10K at 5 years without recasting, you still have about 23 years remaining to pay, and pay about $92.6K in interest instead of 93,255. With recasting, including both the first 5 years and the remaining 25, you pay 85717 in interest. If you save/apply the 59/month you save from recasting towards the principal, you would actually pay of the loan in about 27 years, or a year sooner than not recasting.

I verified this using an on-line amortization calculator, so feel free to check me.

ok, so you're telling me that if I prepay 10K, 25 years before the end, I will only save $650 in interest? I'm not see how this is a reasonable number considering 10K at 5% will double in about 14.4 years(rule of 72) and thus generate 10K+ interest in 25 years.

also if you prepay the 59/month every month, you should get the exact same results as not recasting. if I pay the same payment to a debt with the same balance, same interest rate, and same method of calculating interest, I should get the same results, right?(the only difference being I have the option to put the $59/month somewhere else)

[EEinNJ]

Simpletron,
I see where the confusion is. When you make a pre-payment of principal, it does not change your amortization schedule or "jump you ahead" in the schedule. It is applied to the end of the loan. This is the reason why, without recasting, you don't save much money on interest, because the amount of interest you pay is still being based on the initial amount of the loan, NOT the new balance. As you know, early on in the loan your paying mostly interest, and vice versa at the end. So, as is intuitive, you save more money on interest by borrowing less for a shorter term.

[wincrasher]

EE,

It depends on how your loan is constructed.

On a simple interest loan, which my mortage is, making any payment knocks the principal amount down immediately, thus lowering the interest paid in that month.

[FrugalFish]

Wincrasher, thanks for that simple clarification. My math is working out the same as Simpletrons, so I was getting a little confused over here. Any prepayments to principal we have made on our mortgages have immediately changed future allotments of P&I as well as shortened the loan term. I guess it's important to know how extra payments are applied to your specific loan--- then crunch those numbers.

[Thrif-t]

Well since this thread has been brought back up to the top; thought I'd ask the OP, it's been 3 years are you making 30k more? Just wondering with the current economical environment.

[BuckyBadger]

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.

I know this is an old thread, but I recast a mortgage once. They let me do it because it meant they got to keep my business. Had they not let me recast I would have left and done a total refinance at another bank.

Keeping my business was worth the interest that they lost from me.

[Nsmith508]

Paying off your mortgage should come after your retirement is in good shape.