Hi! First time home buyer here. I recently received a 30k bonus at work and I also just bought a condo in SF last year. Interest rate was 5.85% for 30 year.
I’m wondering if I should put the entire 30k toward the mortgage payment and recast or if I should save it / invest it elsewhere and continue making payments as usual. Any advice is greatly appreciated!
If I were you, I wouldn’t spend the entire bonus on the mortgage. Maybe 15-20K & then use the rest to stay ahead on my other bills for the year. But that’s just my opinion.
Keir said:
If I were you, I wouldn’t spend the entire bonus on the mortgage. Maybe 15-20K & then use the rest to stay ahead on my other bills for the year. But that’s just my opinion.
Thanks! I guess for context I also really want to lower my overall monthly payments as soon as possible but not sure if I should also wait to refinance
@Gray
You need to ask your mortgage servicer about recasting.
Simply making a large one-time payment wouldn’t lower your future payments.
Zyler said:
@Gray
You need to ask your mortgage servicer about recasting.
Simply making a large one-time payment wouldn’t lower your future payments.
Thank you for teaching me about recasting. Never heard of it and thought the extra payments I make every year from my escrow would have automatically lowered my monthly payments because I thought they would reamortize automatically. Too bad I’m on a VA loan which doesn’t allow recasting.
So then, if I cannot lower my interest payment per month by making extra payments towards the principal, is there any reason why I shouldn’t just invest this money instead? I can’t see one.
So then, if I cannot lower my interest payment per month by making extra payments towards the principal, is there any reason why I shouldn’t just invest this money instead? I can’t see one.
Me neither. I’d prefer to invest in my stock and bond portfolio with a 5.85% mortgage interest rate anyway. Do you have any retirement account contribution space available?
@Zyler
I do. I have only been a homeowner for a few years, but my jaw hit the floor when I realized how flawed my thinking has been… I would have essentially let the bank hold all this extra money for me FOR FREE, and then when I get it back after selling the home, it’s worth less because of inflation… I’m definitely going to be investing it from now on.
I would have essentially let the bank hold all this extra money for me FOR FREE
It’s not for free, IMO. A large one-time payment to principal is money you’d never pay interest on. And since your payment isn’t changing, you’d pay the mortgage off earlier.
It can be substantially earlier, depending on the numbers involved. You can always model that out using a calculator.
and then when I get it back after selling the home, it’s worth less because of inflation…
Presumably what you sell it for is increased, due to inflation.
I do agree that what you sell it for and what you owe are unrelated.
@Lin
Your interest is calculated on the outstanding balance, it’s not lowering the payment, but you are directly getting rid of each payment at the end of the loan when you pay double the principal payment. And double the principal payment at the beginning of the loan is basically nothing.
@Lin
Literally just happened to us. We made a big principal payment and thought it’d cut monthly payment by half….Nope, it shortened our 30 yr mortgage to a 15 yr one 
@Gray
Paying extra right now won’t lower your monthly payment unless your refi or have an arm that adjusts. Might be worth paying 5k extra, depending on what your savings account looks like, save it! Put it into a money market those don’t have bad interest right now and are liquid cash.
@Marlow
They said recast, which is a re-amortization. It will lower payments. Typically, a recast requires a $10k minimum payment and a $250 fee
Corey said:
@Marlow
They said recast, which is a re-amortization. It will lower payments. Typically, a recast requires a $10k minimum payment and a $250 fee
Does that change your interest rate?
@Pax
No, terms stay the same (interest and length of loan remaining)
@Gray
Put the bonus in an account with your bill paying money and then reduce the money you deposit into the account by a set amount, which will be made up for by the pool of money in the account.
Do the math right and don’t mess it up.
It’s what we do for our mortgage with bonus money.
It depends on the rate you can achieve on your investments, which is driven by factors we don’t know such as your age, goals, and personality. If you can earn a higher after-tax return on investments, such as those in retirement accounts, leave the mortgage alone and focus on investing the windfall.
@Tan
Thanks! My 401k and IRA are maxed for 2024 and planning to max 401k in 2025 too. I’m 24 and main goal right now is to lower overall monthly payments on the home
Gray said:
@Tan
Thanks! My 401k and IRA are maxed for 2024 and planning to max 401k in 2025 too. I’m 24 and main goal right now is to lower overall monthly payments on the home
Fair enough, but the point is that you would be lowering the housing payment by an amount that is lower than the investment income you would receive on average from higher yielding investments
@Tan
OP- to simplify what Dry Box is saying, the correct “financial” decision is to compare where you’ll make more money. This is determined by interest rates on your mortgage vs stock market returns. For example, If you borrow money (your mortage) at 1% from your bank, and can get 7% return with that money in the market, it would also make sense to invest instead of paying back the borrowed money. So just compare…do you expect to make better than 5.85% returns in the market? Maybe. Maybe not.
then of course there’s the mental decision. sometimes it just feels better to have less of a mortgage. So gotta weigh that too
@Rin
Helpful, thank you. I guess mortgage interest is tax deductible so comes out to less than 5.85% at the end of the day. Seems like putting it toward an ETF is probably the right decision.