Should I recast my mortgage loan?

[Brandon Arnett]

Hello,

I have a few rentals and need some input. 

I have one property that I bought last year for $475k

Current value is $520k

Interest rate 6.75%
loan amount is $352,000 (I put 25% down when I bought it)

Monthly P/I escrow is $2680

Rents for $2400

im debating putting 100k on the loan and recasting it. this will lower the payment roughly $650 a month and will make it cash flow. What do you think?

[Greg Scott]

Paying off $100K on a loan of 6.75% is the same as investing $100K in an investment that returns a guaranteed 6.75%. If that is the best return you can get on $100K, then do so.

[Brandon Arnett]

Quote from @Greg Scott:

Paying off $100K on a loan of 6.75% is the same as investing $100K in an investment that returns a guaranteed 6.75%. If that is the best return you can get on $100K, then do 

 That only factors in interest and not increase of cash flow... I think there is more math to this than just doing 100k x .0675

Interest saved

Increase in cash flow

What else?

[Elias Halvorson]

Quote from @Brandon Arnett:

Quote from @Greg Scott:

Paying off $100K on a loan of 6.75% is the same as investing $100K in an investment that returns a guaranteed 6.75%. If that is the best return you can get on $100K, then do 

 That only factors in interest and not increase of cash flow... I think there is more math to this than just doing 100k x .0675

Interest saved

Increase in cash flow

What else?

I think you're debating semantics. In general, I would agree with Greg's comment. I don't really like that ROI as high yield savings accounts almost pay 5% these days, surely you could do better than 6.75% 

[Chris Seveney]

@Brandon Arnett

Great answered the question you need to ponder

The other thing I will add is by paying it down will you sleep better at night?

Just recognize that you will have lower payments but that money will be illiquid so your personal financials also come into play

[John Mason]

Maybe wait a  few months and see if rates come down?

[Greg Scott]

Quote from @Brandon Arnett:

Interest saved

Increase in cash flow

My quarter has a heads side and a tails side, but that doesn't mean I have two quarters. Interest saved is the increase in cash flow.  They are different sides of the same equation.

[Marco Anemone]

@Greg Scott

About the only other factor to consider is the tax write-off on the interest.

[Chris John]

@Brandon Arnett

You've got some great answers, but you're thinking about losing $100k in liquidity for a delta of around $2760 a year or $230 a month.  I'd really, really think about that.

@Elias Halvorson hit the nail on the head.  Park the $100k at 5% until you find something better to do with it.  That'll give you around $420/mo instead of the $650/mo in savings, but:

- You'll have liquidity in case you find something better to do with the money

- You'll have the ability to refinance at a potentially lower rate in the future as @John Mason points out.

- You won't extend the term back to 30 years (which is definitely part of your monthly projected savings).  The delta on the 6.75% and 5% is actually only $145/mo.  The other $85 of monthly savings must be coming from extending the term.

- You won't have to pay all of the fees associated with a new loan.

I'd think long and hard before I buried $100k like that.  Heck, you can get a decent rental in many parts of the country with that much (either as a down payment or just paying cash) that would most likely yield you more than $650/mo. 

Good luck with whatever you decide.

[Alecia Loveless]

@Brandon Arnett With $100K you could buy another property using a 20-25% down payment. The new property should have some amount of cash flow, provide additional tax benefits, and appreciate in value while having your bills paid for by the new tenants and the new rent which in my opinion would be a better return on your investment than simply recasting your loan.

However if you are risk averse recasting the loan is a safe, secure option.

[Peter W.]

Quote from @Greg Scott:

Paying off $100K on a loan of 6.75% is the same as investing $100K in an investment that returns a guaranteed 6.75%. If that is the best return you can get on $100K, then do so.

You do a little worse because you end up with less principle paydown when recasting (the opposite is true if you are simply prepaying. You also do a little worse due to the fees associated. Your main property is also less leveraged so you IRR or return on equity will take a hit
i agree with others, you are better off staying liquid especially with treasuries paying 5.3%

ulitimately it comes down to the rate of return you need for your financial goals. If 6.5% is good enough and you’ll sleep better at night with more cash flow margin. For me the return is too small.