Mortgage recast vs extra payments

[Anonymous]

Anonymous wrote:

Anonymous wrote:So many threads supporting paying off mortgages early.

People who tell you to pay your mortgage off early, especially when you have a rate well below HYSA rates, don’t understand compound interest or inflation. 20 years from now your current mortgage payment will be the same, but in 2043 dollars, you’re paying far less in buying power. And, that entire 20 years, you have the lump sum you could have used to pay off the mortgage invested and compounded for the entire time.

You don’t understand how age works. Someone who took out a 30 year mortgage at 55. Might want to pay it down sooner as at 67 income drops like a brick.

NP. I have never understood why people want to pay off a mortgage by retirement. Why do people think people want to stay in that property? The whole 30-year mortgage thing assumes people are going to stay in one house forever and then stay there during retirement. I don't understand it. I am a young GenX. The longest place I have lived is 6 years. No way I am paying off a mortgage by retirement...because who cares? I won't be living there in retirement. I will be selling and downsizing.

[Anonymous]

Anonymous wrote:Unpopular opinion ‼️ 🚨

We are 45, have a child headed off to college next year, another one 3 years behind him and are mortgage free. It is the most liberating feeling for me. When I have a bad day at work I’m like, whatever. I get to finish out the rest of my life without a mortgage.

I am 45, I own a house, am single and my youngest is 8. I am selling my house in the spring. I have hated owning. I will be finishing the rest of my life without a mortgage because I won't have one...I will be renting...forever. I would rather invest my money and rent and have flexibility than own a house.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:So many threads supporting paying off mortgages early.

People who tell you to pay your mortgage off early, especially when you have a rate well below HYSA rates, don’t understand compound interest or inflation. 20 years from now your current mortgage payment will be the same, but in 2043 dollars, you’re paying far less in buying power. And, that entire 20 years, you have the lump sum you could have used to pay off the mortgage invested and compounded for the entire time.

You don’t understand how age works. Someone who took out a 30 year mortgage at 55. Might want to pay it down sooner as at 67 income drops like a brick.

NP. I have never understood why people want to pay off a mortgage by retirement. Why do people think people want to stay in that property? The whole 30-year mortgage thing assumes people are going to stay in one house forever and then stay there during retirement. I don't understand it. I am a young GenX. The longest place I have lived is 6 years. No way I am paying off a mortgage by retirement...because who cares? I won't be living there in retirement. I will be selling and downsizing.

Because not everyone plans to move or downsize. I hope to upsize. We have a very small house but not having a mortgage is freeing.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:So many threads supporting paying off mortgages early.

People who tell you to pay your mortgage off early, especially when you have a rate well below HYSA rates, don’t understand compound interest or inflation. 20 years from now your current mortgage payment will be the same, but in 2043 dollars, you’re paying far less in buying power. And, that entire 20 years, you have the lump sum you could have used to pay off the mortgage invested and compounded for the entire time.

You don’t understand how age works. Someone who took out a 30 year mortgage at 55. Might want to pay it down sooner as at 67 income drops like a brick.

NP. I have never understood why people want to pay off a mortgage by retirement. Why do people think people want to stay in that property? The whole 30-year mortgage thing assumes people are going to stay in one house forever and then stay there during retirement. I don't understand it. I am a young GenX. The longest place I have lived is 6 years. No way I am paying off a mortgage by retirement...because who cares? I won't be living there in retirement. I will be selling and downsizing.

We aren’t staying here for retirement either. But the proceeds from this house with buy any house we’d want anywhere we’d move. Still mortgage free. It lowers the amount of income we need our retirement accounts to generate by several thousand per month.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:So many threads supporting paying off mortgages early.

People who tell you to pay your mortgage off early, especially when you have a rate well below HYSA rates, don’t understand compound interest or inflation. 20 years from now your current mortgage payment will be the same, but in 2043 dollars, you’re paying far less in buying power. And, that entire 20 years, you have the lump sum you could have used to pay off the mortgage invested and compounded for the entire time.

You don’t understand how age works. Someone who took out a 30 year mortgage at 55. Might want to pay it down sooner as at 67 income drops like a brick.

NP. I have never understood why people want to pay off a mortgage by retirement. Why do people think people want to stay in that property? The whole 30-year mortgage thing assumes people are going to stay in one house forever and then stay there during retirement. I don't understand it. I am a young GenX. The longest place I have lived is 6 years. No way I am paying off a mortgage by retirement...because who cares? I won't be living there in retirement. I will be selling and downsizing.

For most people now, it is cheaper to stay in their current, paid off, large home than attempt to downsize. This is especially true if they plan to stay in their home market or move to a vacation home market where prices have exploded.

I am dealing with this with my parents now in a lower COL area- the best I can get them for their big old house, after sales fees and taxes, is an old condo in a slightly better neighborhood with high fees. With the crazy run up in prices, the only way you can profit from a downsize is if you go from a HCOL area where you experienced exceptional price appreciation to a much lower COL area. You know, a depressed area with scant services, where your friends and family are not likely to be.

[Anonymous]

maybe to phrase the numerical argument a bit differently, the mortgage backed securities index, which consists of $7.7 trillion outstanding of mortgage backed securities (this is where all your conforming mortgages live), has a weighted average coupon of 2.94% and trades for $86.5 / $100. For anyone who pays a dime more than they need to on their mortgages, that person is saying "I would like to buy this thing that the market has said is worth $86 for $100". the "pay it off" types tend to be frugal savers, but in this respect they are making an illogical luxury purchase based on emotion. If someone said they bought a car at a dealership that was listed for $40,000 for $48,000 to "feel good", most would consider that person insane. There's some tax / financial aid considerations, but it's still amazing to me that some folks are trying to prepay (in any way) in the current environment.

So if you have a $1mm mortgage, it's worth $850K. If you prepay, you are basically saying "$150K is not worth much to me" (or if you prepay 10%, $15K)

[Anonymous]

Anonymous wrote:maybe to phrase the numerical argument a bit differently, the mortgage backed securities index, which consists of $7.7 trillion outstanding of mortgage backed securities (this is where all your conforming mortgages live), has a weighted average coupon of 2.94% and trades for $86.5 / $100. For anyone who pays a dime more than they need to on their mortgages, that person is saying "I would like to buy this thing that the market has said is worth $86 for $100". the "pay it off" types tend to be frugal savers, but in this respect they are making an illogical luxury purchase based on emotion. If someone said they bought a car at a dealership that was listed for $40,000 for $48,000 to "feel good", most would consider that person insane. There's some tax / financial aid considerations, but it's still amazing to me that some folks are trying to prepay (in any way) in the current environment.

So if you have a $1mm mortgage, it's worth $850K. If you prepay, you are basically saying "$150K is not worth much to me" (or if you prepay 10%, $15K)

Thanks for the numbers. Given that, wouldn't mortgage companies today simply reject recasting since it costs their investors real money?
Mine says: "contact us to see if you're eligible" - but it's absolutely not in the mortgage company's interest to allow you to recast especially if you don't have a contractual right to do so.

[Anonymous]

it is in the "mortgage company's" interest to re-cast. a recast accelerates paydown. you give them principal today to lower your payment. if one didn't recast, then that principal would be due later than today. You are giving the bank principal that they can take and invest at higher rates. if you don't give them the principal via a recast payment, then they continue to earn the mortgage's rate (which is well below market). Every bank / MBS holder out there wants everyone to prepay (make extra payments, recast paydowns, etc).

[Anonymous]

my 401k owns the bond index which in turn owns mortgage backed securities that trade at substantial discounts to par. anyone who accelerates the paydown of their mortgage is directly transferring wealth to me. you are giving me par, for somethign I'm buying for 85 cents. it's zero sum. a transfer of wealth from the emotional to the numerical.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Unpopular opinion ‼️ 🚨

We are 45, have a child headed off to college next year, another one 3 years behind him and are mortgage free. It is the most liberating feeling for me. When I have a bad day at work I’m like, whatever. I get to finish out the rest of my life without a mortgage.

Yup! The mental aspect of being debt-free is underrated.

I guess this is an unpopular opinion, but I agree with these two PPers. I recently did a recast on my mortgage because I'm worried I could get laid off in a few years when the company I work for is sold. (It was recently purchased by a private equity firm bundling public affairs firms together and will sell them off in a few years). I don't know how hard it will be for me to find another job at my age (53 yrs old).

The recast dropped my monthly payment but I'm just paying the same amount in hopes of paying off my mortgage early. It just gave me a little more comfort that I'll be able to afford my mortgage no matter what happens.

[Anonymous]

Anonymous wrote:my 401k owns the bond index which in turn owns mortgage backed securities that trade at substantial discounts to par. anyone who accelerates the paydown of their mortgage is directly transferring wealth to me. you are giving me par, for somethign I'm buying for 85 cents. it's zero sum. a transfer of wealth from the emotional to the numerical.

Unless they default, it's not a big difference to your fund.

[Anonymous]

Of course, it’s not material, just trying to illustrate why folks should rethink paying anymore required. Literally taking money out of your pocket and giving it to someone else.

[Anonymous]

Anonymous wrote:it is in the "mortgage company's" interest to re-cast. a recast accelerates paydown. you give them principal today to lower your payment. if one didn't recast, then that principal would be due later than today. You are giving the bank principal that they can take and invest at higher rates. if you don't give them the principal via a recast payment, then they continue to earn the mortgage's rate (which is well below market). Every bank / MBS holder out there wants everyone to prepay (make extra payments, recast paydowns, etc).

I think you're confusing prepayment with recasting.

The question is whether a mortgage lender has an interest in letting you recast *after* you prepaid an amount on your mortgage. Almost all mortgages today have no prepayment penalty, so you can prepay without needing the lender's permission. You do need their permission if after prepaying you want to recast.

Now what might be a good strategy would be to approach the lender and offer some prepayment in exchange for recasting. Then it would be a win-win, but still since the lender is obliged to let you prepay, and not obliged to let you recast, they may still take your prepayment without letting you recast.

[Anonymous]

By “recast”, I’m referring to a lump sum payment that pays down principal but keeps term same so you have a lower payment but same term.

As defined here:


https://www.rocketmortgage.com/learn/recast-mortgage

A mortgage recast is when you make a lump-sum payment toward the principal balance of your loan. Your lender will then reamortize your mortgage with the new (lower) balance. Your interest rate and term remain the same, but you can lower your monthly payments because your principal went down.
Most commonly, homeowners recast a mortgage when they’ve purchased a new home but haven’t sold their old one. Once the previous property has been sold, then the homeowner can use the proceeds of the sale toward a recast of their new mortgage.
A recast is also an option for those who receive a large amount of money and desire to lower their mortgage expenses. For example, a homeowner receives an inheritance or a large bonus from work.

[Anonymous]

Anonymous wrote:maybe to phrase the numerical argument a bit differently, the mortgage backed securities index, which consists of $7.7 trillion outstanding of mortgage backed securities (this is where all your conforming mortgages live), has a weighted average coupon of 2.94% and trades for $86.5 / $100. For anyone who pays a dime more than they need to on their mortgages, that person is saying "I would like to buy this thing that the market has said is worth $86 for $100". the "pay it off" types tend to be frugal savers, but in this respect they are making an illogical luxury purchase based on emotion. If someone said they bought a car at a dealership that was listed for $40,000 for $48,000 to "feel good", most would consider that person insane. There's some tax / financial aid considerations, but it's still amazing to me that some folks are trying to prepay (in any way) in the current environment.

So if you have a $1mm mortgage, it's worth $850K. If you prepay, you are basically saying "$150K is not worth much to me" (or if you prepay 10%, $15K)

Doesn't this math only work if your rate is the same as the average of 2.94%? A mortgage at 6 or 7% would be closer to par, no?