If you have paid down the principal of a mortgage significantly, and the lender allows you to recast for little or no cost, it's worth recasting, because this gives you an option. Recasting a mortgage reduces the monthly payments, allowing you to pay less each month if you have cash flow issues, need the money for something else, or prefer investing the money. Alternatively, even after recasting, you can pay off the mortgage at the original rate and pay the same amount.If taking that extreme measure to sell the bond position, would it be better to pay the 300k against principal or to recast the mortgage?
The other option after a significant paydown is to refinance. If you pay down a 30-year mortgage and refinance to a 15-year mortgage at a lower rate, you may have about the same monthly payments, but you will be paying less in interest.
But even if you cannot recast or refinance, paying down the mortgage gives a tax-free, risk-free, long-term return of 6.5%. And that is a great return when the return on low-risk, long-term municipal bonds is 3.68% (current yield on Vanguard Long-Term Tax-Exempt Admiral). Selling $100K of munis to pay down the mortgage gives a return of $2820 per year without changing your stock-market risk.
If you sell all your bonds, it isn't quite as clear whether to sell stock to pay down the mortgage. I would recommend selling stock as long as you do not pay a large capital-gains tax, as that tax would wipe out the advantage. While stock can earn more than 6,5% after tax, it does so with a lot of risk; most investors would prefer a risk-free 6.5% over a slightly higher risky return.
Statistics: Posted by grabiner — Mon Sep 02, 2024 8:35 am