How to Change Mortgage Due to Gift?

[youbet]

DS's MIL has offered to gift he and his bride $20k with the string attached that the money must be used to reduce the principal on their mortgage. They currently owe $115k and there are 9 years left on their 6% 15yr mortgage.

Any ideas on how they should handle this? They're calling the bank today to ask about options. They'd like to simply have their monthly payment reduced and they'd apply the savings to their 401k's which are not currently being fully funded.

Thoughts? Ideas on what their options might be?

 

[brewer12345]

DS's MIL has offered to gift he and his bride $20k with the string attached that the money must be used to reduce the principal on their mortgage. They currently owe $115k and there are 9 years left on their 6% 15yr mortgage.

Any ideas on how they should handle this? They're calling the bank today to ask about options. They'd like to simply have their monthly payment reduced and they'd apply the savings to their 401k's which are not currently being fully funded.

Thoughts? Ideas on what their options might be?

Not likely to be agreed to by the bank. Ther choices are to pay down $20k and leave the payment as is, or refi.

 

[OAG]

Prepayment penalties? PENFED Refi HE 5.39% for 120 months?

 

[CitricAcid]

Adding on to Brewer's post, it is very unlikely that they will decrease the monthly payment, but will just most likely have the payments end 2-3 years sooner. Refinancing on the 115k mortgage with a 95k mortgage (paying the difference to the bank in the form of cash) is also a possibility but a lot of hassle involved with that.

 

[brewer12345]

Prepayment penalties? PENFED Refi HE 5.39% for 120 months?

Sounds attractive to me. Lower rate, minimal costs to refi and achieves the desired drop in monthly nut.

 

[Westernskies]

I went through this a few years ago. Four years after I originated my home mortgage, I sold some property and wanted to use the proceeds reduce my mortgage payment. Called the mortgage company, talked with a supervisor, and requested that they re-amortize the loan at the same interest rate, the term would be for 26 years instead of 30. - I explained the situation, told them I was willing to refinance the loan with another lender at a slightly better interest rate if they couldn't accommodate me. Talking points were that DW and I were both 800+ credit scores, never late on a payment, it would lower their loan/value exposure ratio, good customer service, etc.

Took a week, but they agreed to do it- for a $500 fee to do the paperwork. It was the best $500 I ever spent. Saved almost that much in interest the first month.

Discussing it with the rep, apparently the biggest factor is whether the load had been packaged and sold to another investor; mine had not.

 

[OAG]

In OP's case that would be almost a half percent of cost in addition to their own money. I like PENFED solution better (No closing costs), lower rate by almost a half percent, very quick processing. Only thing I would check is if the current loan carries a prepayment penalty they do not want to pay.

 

[youbet]

Thanks everyone for the inputs......

Haven't heard from DIL as to what alternatives the bank offered when she called. In the past few years, the bank has accomodated them twice by refinancing with no costs to them. The first time lowered the interest rate on the balance of their original 30 yr mortgage. The second time they went to their current 15 year mortgage. Therefore I was hoping the bank would be flexible with this situation.

The PenFed refi sounds very interesting.... The kids have no prepay penalty on the current loan so that option would be open and I'll check it out.

 

[youbet]

New Clues.......

It seems the kids' current mortgage is at 5%, not the 6% figure I gave. Sorry. It also seems that the bank is, once again, willing to be flexible. Any comments ref option 1 vs option 2? Option 2 meets their goal of having some additional money every month to apply to their 401ks and the $250 recalculation fee seems reasonable.

Current Mortgage: 15 yr Fixed, 5.00%
Principal Remaining: $113,639
Payments: We have made 68 payments and have 112 payments remaining


Option 1 - Pay $20K Against Principal, Keep Payment Same

• Principal left on loan goes from $113,639 to $93,600
• Will take 7 yrs to pay off loan (vs. 9.3 yrs)

Option 2 0 - Pay $20K, Have Bank Recalculate Monthly Payment

• There is a fee of $250 to recalculate
• Principal left on loan goes from $113,639 to $93,600
• Will take 9.3 yrs to pay off loan
• Monthly Payment will go down from $1358 to $1047.53 = $310.47/mo reduction

The bank did not recommend refinancing based on our current interest rate.

 

[brewer12345]

Well it seems the bank is willing to be accomodative, so they must not have sold the loan. If it were me, I would go with Option 1 and keep the $250 fee.

 

[youbet]

Well it seems the bank is willing to be accomodative, so they must not have sold the loan. If it were me, I would go with Option 1 and keep the $250 fee.

Yes, I would too. But, due primarily to the expenses of a special needs child, their budget is pretty tight and they'd like to kick up 401k contributions a bit so I'm betting the go for the lower monthly payment. Not an unreasonable thing to do. I'll cover the $250........

Thanks Brewer to you and all who added the informative comments!

 

[OAG]

With the additions you made AND the fact that the $250 is NOT a factor (at least for the kids) I would also opt for the lower payment option.

 

[2B]

An unstated variable is whether or not they have a decent emergency fund in place. If they are living with a tight budget that usually means they've pissed away any available cash. My concern if they lower their payment is that the lower payment won't find its way into an emergency fund or into their 401ks.

In general I view a paid off home mortgage as sunk capital. Unless there are substantial assets readily available, the smallest of emergencies can become financial disasters. I have had the cash flow squeeze on two separate job losses.

The first was a near disaster that could have resulted in bankruptcy. We had no meaningful amount of assets outside our home equity. The second was a completely paid for house but only enough non-IRA money to live on for about 6 months after the severence ran out. Of course the severence lasted a year. We sold the house before then so we actually were FI with a reduced lifestyle. I could have retired but that was well before I discovered this forum and understood what now seems so obvious.

 

[OAG]

Youbet seems to be the Emergency Fund, at least in this case. But IMHO that has nothing to do with the original question.

 

[ERD50]

Let me throw out an alternative view:

I know that the desire of the gift-giver is that the funds are used to lower the mortgage principle, but....

the end result of the mort pay-down (option #2) is increased cash flow ($310/mo lower payment) for needs and 401K contributions. So in reality, the gift money is going to needs and 401K contributions. The mortgage pay-down just becomes a means to increased cash flow.

So, why not 'cut out the middle man', and just draw $310/mo from the cash stash? Is there really any advantage in getting the mortgage paid down? It is a sort of 'shell game' with the money (not in a bad way - just a descriptive way). 5% is a good rate....

Maybe the gift-giver would not be comfortable with this, if their focus is 'pay off the mortgage'. So be it, follow their wishes. Just an alternate thought.

If the gift-giver is thinking 'oh, they might tap into the money and spend it, so locking it up in the mortgage protects it'... well, there is nothing stopping them from taking out a HELOC against it, is there? The bottom line in this is, a gift is a gift. If the gift-giver is concerned about how well the money is to be used, maybe they shouldn't be giving the money in the first place?- just my view on this.

Don't forget tax implications, a portion of that $310 savings is probably offset by tax deductions. If they use all $310 each month, they may find they didn't save enough for taxes at year end! If they keep the cash working, there will be taxes on the earned interest to consider.

Maybe this is just over-complicating everything, but it is something to consider, no matter what you do.

-ERD50

 

[2B]

Maybe this is just over-complicating everything, but it is something to consider, no matter what you do.

-ERD50

That's what we do here.

 

[youbet]

Good comments, thanks....

2B - An unstated variable is whether or not they have a decent emergency fund in place.

Good point. And, IMO, their emergency fund is a little thin. With a special needs child in the budget, it's always a dilema deciding how much you carry in each savings/investment category vs. what you spend doing the best you can for the child. So, as OAG correctly assumed, I arrange my finances so that I serve as their backup. They both have good engineering jobs and their emergency savings would carry them through a loss of one job for quite a while. If they both lost their jobs, I and/or DS's MIL would probably have to come into play in less than a year. However, it's a moot point since DS's MIL if offering the $20K with the strict contengency that it be used to pay down the mortgage.

ERD50 - So, why not 'cut out the middle man', and just draw $310/mo from the cash stash? Is there really any advantage in getting the mortgage paid down? It is a sort of 'shell game' with the money (not in a bad way - just a descriptive way). 5% is a good rate....

Maybe the gift-giver would not be comfortable with this, if their focus is 'pay off the mortgage'. So be it, follow their wishes. Just an alternate thought.

As mentioned, DS's MIL is offering to pay down their mortgage by $20K, not gifting them $20K with a mild suggestion they use it to pay down the mortgage. And that's her buisness I guess. My impression is that she is a very strong willed woman with her own unique (and obviously extremely conservative) views on investing. Hence, the original question to the forum. I wouldn't pay off any of a 5% fixed mortgage myself.

 

[Marquette]

Personally, I'd keep the original term and reduce the monthly payment. That'll give a little boost to how far one can stretch the emergency fund. And, if they think they can earn better on their investments than 5% long-term, then it'd be better to start those now rather than pushing them off a theoretical max of 7 years.

 

[Westernskies]

As mentioned, DS's MIL is offering to pay down their mortgage by $20K, not gifting them $20K with a mild suggestion they use it to pay down the mortgage. And that's her buisness I guess. My impression is that she is a very strong willed woman with her own unique (and obviously extremely conservative) views on investing. Hence, the original question to the forum. I wouldn't pay off any of a 5% fixed mortgage myself.

Nothing like the feeling of making that last mortgage payment. Have seen several posts here to that effect. Whether it is at 5% or 25% isn't the issue, it is the sense of accomplishment, freedom and relief that retiring that sucker brings- casting off the ball and chain that you were tied to for however many years. Early parole, maybe? Not sure how you factor that into the ROI equation.

 

[ERD50]

Nothing like the feeling of making that last mortgage payment. Have seen several posts here to that effect. Whether it is at 5% or 25% isn't the issue, it is the sense of accomplishment, freedom and relief that retiring that sucker brings- casting off the ball and chain that you were tied to for however many years. Early parole, maybe? Not sure how you factor that into the ROI equation.

Whether it is at 5% or 25% isn't the issue,

A dollar of net worth is a dollar of net worth. Whether it is in a liquid account, or a reduction in a loan balance in a less liquid house.

Behavioral Finance

Dollar Equality

Are all of your dollars created equally? If you’re like most people, the answer is no. The term “mental accounting” refers to the tendency to categorize and treat money differently depending on where it comes from, where it is kept, and how it is spent. This emotional compartmentalization is a significant reason investors unwittingly make big mistakes with their portfolios.

I'm not saying that getting the mortgage paid off is a mistake, all I'm saying is if you put a lot of value to that emotional element, maybe you aren't really looking at the financial aspect correctly?

Now, relevant to the OP - if the $20,000 is truly dependent upon paying down the mortgage - then it is a no-brainer - you pay down the mortgage and say 'Thank You!'!

BTW, this subject has been beat to death, so I'll stop here. Search 'emotion' and 'mortgage' and the FAQs for more than you want to know.

-ERD50

 

[2B]

I'll add "cash flow" to the search. I have been pinched twice with high levels of home equity but with little after tax savings to live on during an uncomfortable situation.

 

[youbet]

Now, relevant to the OP - if the $20,000 is truly dependent upon paying down the mortgage - then it is a no-brainer - you pay down the mortgage and say 'Thank You!'!

Yep. Accepting the money and applying it to the mortgage was never in doubt. In my original question, I asked that since the kids were receiving a gift of $20K with the contingency that it be applied to their mortgage, what were their options? Re-fi? Apply to principal resulting in a shorter term? Apply to principal and have the bank recalculate lower payments for the same term? Etc.......

Looks like they're going with the option of lower payments which is fine with me and seems like a reasonable choice given their options and their personal circumstances.

Thanks all for the comments and discussion.

 

[jIMOh]

Find an investment which returns 5% and ask the gift giver to put money in that account for them. Once the mortgage balance is below 20k, pull the money out of account and pay it off, keeping the interest in the account for retirement.

Wellesley yields 4+% and returns more than 5% year over year, and might be a good option to suggest.