We close on a home on the 2nd day of the month and intend to recast the loan with the proceeds of our current home on the 90th day. I have the option to short-pay or regular-pay the new mortgage.
I’m trying to determine which way to go. We’d like to hold on to as much cash as possible until we recast the loan. But, if there is a benefit to doing one or the other in my particular scenario for the first 90 days, I can’t quite figure out the math.
If I’m recasting the loan on day 90, would either scenario save me a principal payment? My lender says I’m paying the 90 days of interest regardless. We are applying any remaining cash on hand at the 90-day mark, so even if it saves me a principal payment, I’m still using the funds to pay down the loan at that time.
- Will I save any cash flow by doing one or the other for the first 90 days?
- Will one or the other end up costing me more over the long run?
Thanks for your feedback
No matter how you look at it you are renting money. Unless there’s something very unusual about your mortgage, making normal payments until you pay down the principal will result the lowest cost to you.
The payments are the same. There is no special payment arrangement. This is really about the closing transaction and the options presented by the lender based on closing at the beginning of the month vs the middle to end of the month.
Further looking at this, the difference is:
- If I short pay, I’ll pay 28 days (November) of interest at closing, then a full P&I payment on 12/1, 1/1, and 2/1? Then recast the loan on 2/2.
- If I regular pay, I’ll pay 28 days (November) + 31 days (December) of interest at closing, then a full P&I payment on 1/1 and 2/1?. Then recast the loan on 2/2.
Short term for cash flow, the difference is paying an extra principal payment ahead of the recast, vs holding on to the principal payment and still giving it to the lender when I recast. I’m still trying to understand when things are amortized so I can calculate the difference between one principal payment over 3 months when considering the impact on the remaining term of the loan over the subsequent 357 months.
Put the numbers into Excel and calculate the interest each way. But unless you’re considering paying that cash from your old home earlier than day 90, you’ll find that the difference isn’t enough to stress about. Maybe you could buy a pizza with it. Maybe.
I can’t recast the loan ahead of 90days (predetermined by the rules of the banks investor)
And it’s the available funds for the pizza(s) I’m trying to figure out.
I’m not stressing out. I’m just more curious than most.
You can’t recast the loan, but you can make an extra payment in that time.
If by “short pay” you mean “short payoff” when you recast the loan then, in terms of interest paid to the lender, the longer you delay paying down the principal, the more interest you will pay.
The only other variable is how you value your money on-hand in terms of what it costs you to hold it.
Agreed. I’m trying to figure out the differential given I’m carrying two mortgages for the short term. I need as many funds as possible for preparing to sell, as well as repairs and updates ahead of the move.
It may be an immaterial amount, but I’d still like to figure it out.
Just go to moneychimp.com and run the two scenarios. Then compare the amount of the remaining principal in each one.