Hello, I recently got a new mortgage of $410,000 at a 6.62% interest rate with a 5% down payment since we hadn’t sold our previous home yet. After selling our previous home, we now have $65k. Our current monthly payment is $3300, with $670 for escrow and $2630 for principal and interest. With recasting and using the $65k, the new monthly payment would be $2208, saving $422 monthly. Removing PMI could save an additional $112 monthly, totaling $534 in monthly savings. The recasting fee is $500. Should I recast or just apply the $65k directly to the principal? Or should I invest the $65k elsewhere, perhaps in paying down lower-rate car loans? What’s the smart move here, given that conventional wisdom suggests tackling higher interest rates first? Am I overthinking this? Thanks for your insights.
You might consider recasting and then continue paying the original amount. This way, you can retire the debt in just over 17 years by adding the $534 to the new $2208 payment, according to an amortization calculator that allows for extra payments.
@Niko
If the goal of recasting is to reduce your monthly payments, why pay extra to recast only to keep the monthly payment the same? Paying the lump sum directly can also advance your payoff date without the need to recast.
@Niko
What’s the advantage of paying directly towards the principal and maintaining the same payment amount over recasting, which spreads the balance over the original loan term for a $500 fee?
Emory said:
@Niko
What’s the advantage of paying directly towards the principal and maintaining the same payment amount over recasting, which spreads the balance over the original loan term for a $500 fee?
Recasting adjusts your payment schedule over the remaining term of your loan, with a new amortization schedule potentially lowering the interest portion compared to just paying the principal directly.
@Raven
Exactly. If you’re three years into a 30-year mortgage and recast, your payments are recalculated for the remaining 27 years.
@Raven
The amount going towards interest remains proportionate to the balance, whether or not you recast. Not recasting might lead to more of your payment going towards principal due to additional monthly principal reductions.
Emory said:
@Niko
What’s the advantage of paying directly towards the principal and maintaining the same payment amount over recasting, which spreads the balance over the original loan term for a $500 fee?
Recasting provides a lower minimum monthly payment, which could be a safety net during financial uncertainties, though you can still pay extra to shorten the loan term.
The general advice is to prioritize debts with the highest interest rates first, not necessarily those with the largest balances. If reducing monthly expenses isn’t a necessity, applying the $65k directly to your mortgage principal might be best, especially to eliminate PMI. Keeping your monthly payments the same accelerates your payoff.
@Addison
Yes, my mistake, I meant the highest interest rate. Thank you for clarifying.
Can PMI be removed either way? If dropping below 78% LTV allows for PMI removal after an appraisal, then directly applying the $65k to the principal might save more in interest long-term and shorten your loan term. If a lower payment is needed, then consider recasting.
@Jaden
A lower monthly payment isn’t a necessity, so directly reducing the principal to finish the mortgage sooner sounds appealing. I’m also not entirely sure about the PMI situation, but it seems worth it to pay for an appraisal if needed.
@Emory
Running the numbers through a calculator considering both recasting and paying the original amount might help determine the best approach.
Jaden said:
@Emory
Running the numbers through a calculator considering both recasting and paying the original amount might help determine the best approach.
Paying the recasting fee without changing your payment doesn’t make financial sense unless it significantly affects the interest paid.
I faced a similar decision and chose to put half of our home sale proceeds towards the mortgage. This not only saves on interest but also cuts down the loan term significantly. We’re also investing the rest into the stock market for potentially higher returns than the mortgage interest rate.
What are your car loans’ balances and monthly payments? This could influence the decision on whether to pay those off first.
Raven said:
What are your car loans’ balances and monthly payments? This could influence the decision on whether to pay those off first.
We owe $13k at $300 a month and $22k at $480 a month on our cars.
@Emory
Considering using part of the $65k to clear both car loans would free up $780 monthly, which could then be redirected towards accelerating your mortgage payments. Investing the rest might also be a wise choice.
When deciding to pay down debt, always consider the interest rates and potential investment returns. The first-year return after recasting could effectively be 9%, which is compelling when compared to typical investment returns.
If you don’t recast and use the $65k to reduce your mortgage balance while keeping the same payments, you’ll pay off your home sooner. Also, consider keeping part of the money as an emergency fund, which could cover unexpected expenses or repairs.