Recast, Refinance, Prepay or Invest
Four things to do with a windfall when you have a mortgage, on one monthly budget and one horizon: the new payment, the interest saved, the cash you keep, and the net worth each leaves, with a range on the one that depends on markets.
Your mortgage and the windfall
Recast
A recast re-amortizes the lower balance over the years you have left at the rate you already have. Most conventional loans allow it; FHA and VA loans usually don't.
Refinance
Investing
Most net worth in 30 years, average market
Refinance
$613,611
Recast payment
$1,706
Down from $2,098, same payoff date
Prepaying ends the loan in
17 yr 2 mo
$187,566 of interest saved
Investing beat prepaying in
48%
of 500 markets; it keeps $60,000 on hand
The four moves
| Move | Payment | Freed to invest a month | Loan ends in | Interest saved | Cash on hand after | Net worth, average market | Worst tenth | Median | Best tenth | Beat prepaying |
|---|---|---|---|---|---|---|---|---|---|---|
| Prepay, keep the payment | $2,098 | $0 | 17 yr 2 mo | $187,566 | $0 | $521,195 | $363,501 | $507,948 | $692,089 | – |
| Recast to a lower payment | $1,706 | $391 | 27 yr | $67,103 | $0 | $545,593 | $308,991 | $501,084 | $851,908 | 50% |
| Refinance with the windfall down | $1,595 | $503 | 30 yr | $51,550 | $0 | $613,611 | $320,544 | $555,785 | $991,732 | 63% |
| Invest, leave the loan alone | $2,098 | $0 | 27 yr | $0 | $60,000 | $570,754 | $256,077 | $497,986 | $949,153 | 48% |
Every move has the same $2,098 a month to work with and invests what its payment leaves over. Net worth is what has been invested less what is still owed after 30 years.
Net worth from the windfall, average market
Starts negative because the loan is still owed. Prepaying and recasting earn your mortgage rate with certainty; the investing line is an average, and the table shows how wide the outcomes around it run.
How it works›
One budget, one horizon. Each move is given the same monthly budget, the largest payment any of them needs, and invests whatever its own payment leaves over, including the whole payment once a loan is paid off. All four are measured at the end of the longest loan. Without that, a lower payment looks like a saving when it is only a slower payoff.
What prepaying earns. A dollar of principal paid early earns exactly the loan's rate, after tax and without risk, until the loan would have ended. So investing wins on average only when the average return beats the mortgage rate, and the four tie when they are equal. A recast earns the same and hands the saving back monthly instead of at the end.
The range. Investment returns are drawn monthly from a lognormal distribution with your average and volatility, 500 seeded markets that every move faces alike (one, when volatility is zero and they would all be the same). Volatility drags on compounding, so the median sits under the average-market figure, and a return a point above the mortgage rate can still lose about half the time.
What it leaves out. Tax on investment returns and the mortgage interest deduction, which pull in opposite directions; private mortgage insurance that a lower balance might end; and the value of cash on hand, which is why the table shows what each move leaves you holding.