A few years ago during Covid I decided to say “Yes” more. “No” is negative and exclusionary while “maybe” can be so unfulfilling. But yes is exciting and freeing while also sometimes being a little terrifying. Life is short, as they say, and I wanted to put myself out there and reset my definition of possible. So both in my personal and business life I was determined to move forward instead of getting stuck in analysis paralysis mode, as was my habit. Call it an occupational hazard.

This led to some exciting ramifications but I won’t bore you with all that here. Instead, let me briefly share some details about a recent yes adventure that was a powerful experience containing more than its share of pain.

As many of you know, after years of running ultramarathons I started dabbling in paddle sports some time back. Last year I was asked to join a crew trying to set a new world record for distance travelled by a dragon boat in 24 hours. I said yes at the time without really knowing what a dragon boat was. I had to Google it. But our team accomplished our goal and got to see a chunk of the historic Missouri River along the way. I can laugh about that experience now because it was something I never, ever thought I’d be doing. Would I still have said yes if I knew how hard it would be? Maybe not but I’m glad I did.

As often happens, one thing follows another and I was asked several months ago if I wanted to be part of a two-person crew paddling a handmade mahogany kayak called “The Condor” from Tampa Bay in Florida down to Key Largo in a race called The Everglades Challenge. Sounds pretty good, right? Am I a kayaker, no. So yes, of course I’ll do it!

Maybe my answer should have been definitely maybe. To say I had limited kayak experience would be stretching the point and my years of running gave me an aversion to sitting for long periods. My race partner would be a veteran of this race and races in Alaska, the Yukon Territory, even the Amazon. He’s written books on the topic but I barely knew him. Sounds even better, right?

However, I committed myself to the task, trained, and toed the starting line with many others on a Saturday earlier this month. The EC, as it’s called, allows sail and paddle craft of various types to enter but no motors allowed. And the challenge is unsupported. Family and crew can only provide moral support along the way. Bystanders can help but this can’t be prearranged. You’re on your own, in other words.

Our goal was straightforward: Paddle roughly 280 miles south to the finish by any available coastal route as fast as possible. Our plan was to head down the Intercoastal Waterway past cities, luxury homes, hotels, and trailer parks. We’d also head “outside” into the Gulf of Mexico for long stretches and eventually leave civilization behind as we passed through Ten Thousand Islands, Ponce De Leon Bay, Everglades National Park, and Florida Bay toward the finish. The race had three mandatory checkpoints and we stopped a few times for rest but I only notched a mystifying 2.5 hours of sleep over nearly four days.

The first day was an anxious one for me. The weather was good but my paddling experience had to this point mostly been in protected waters, often lakes and rivers. Now I was setting off into the unknown. I consider myself a strong paddler but would the seated position be doable for so long? Did I have enough food and water to make it to the first checkpoint? And why did I say yes to this again? These questions and more plagued me throughout much of the first day and night. We often paddled into wind and chop that worsened and, following the loss of our rudder earlier that day, had to work extra hard to keep the boat straight. It was a grind. Numerous justifications for quitting coursed through my mind. Hey, there are city lights over there… maybe let’s quit and I’ll buy the beer… I don’t know but if someone had given me an out that first night I may have taken it.

The second day was better as daylight resets our internal clock and outlook, or at least it does mine. Our plan was to paddle through the first night with a brief stop at the first checkpoint to refill water and not stop for rest until the second evening. As we did so I got more accustomed to the extremely long distances between landmarks. For example, a bridge taking shape on the horizon was an incremental goal – just make it to the bridge. But after what seemed like hours of paddling the bridge was still looming. Eventually we’d make it, of course, and then it’s on to the next bridge or cityscape. There’s something of a life lesson found in achieving one goal only to be presented with the next. Persistence and patience are critical.

We pulled over to a beach just south of the city of Naples for a rest that second night at about 1am. Maybe it was the amazing weather and the southern route calling me but, even tired as I was, I couldn’t sleep for more than an hour. But it was enough. Light pollution faded and the stars shone brightly as we left the beach. Maybe this experience isn’t so bad after all.

Small rewards loomed large. We were fortunate to hit the second checkpoint during daytime which meant the little restaurant on Chokoloskee Island was open. So it was Cuban sandwiches and café con leche before heading out again to paddle all night. This would be a long offshore stretch and I was excited to leave civilization behind.

The weather shifted around a bit but was otherwise beautiful the whole night. We were far enough south that I got to experience bioluminescence firsthand. My partner, in his sleep deprived state, kept asking if a light was on somewhere in the kayak, but it was living organisms generating a greenish-blue light through a chemical reaction. Fish large and small darted by and left trails like shooting stars. Our boat rippled colors and each paddle stroke scooped it up. I probably spent too much time paddling on one side while enjoying the light show. Maybe it was a small gift but, like surprise Cuban coffee, these experiences are part of what I say yes for, so might as well enjoy them!

My partner was exhausted but I was oddly exhilarated as the night progressed. We found a spit of sand to camp on for a few hours but, again, I was only able to grab a little sleep. My mental state didn’t help, but it was the roar of the mosquitoes inches away on my bivy sack that kept me up most. I’ve spent time in the woods and mountains and know a thing or two about the little nasties, but this was otherworldly. Oh well, I can sleep better later I guess.

With the rising sun we saw yet another goal looming far off, the landmass of Cape Sable and a decision. Should we round the Cape and keep navigation simple while adding mileage or take a shortcut through the Everglades. The choice was left to me. We had a good GPS track to follow so I felt it important to travel via the race’s namesake. So it was through Ponce de Leon Bay, up Shark River, and into the Land of Lions, Tigers, and Bears, Oh My!

Truthfully, our Everglades route left a little to be desired. Being a California boy I was more than half expecting to see gators, crocs, and massive pythons waiting to eat me. It ended up being the wind in our face and long distances that proved most frightening. But by this time I was so used to the grind that some prehistoric reptiles would have been a welcome distraction.

We eventually made it through the Everglades unscathed on our third afternoon to reach the final checkpoint at the tiny tourist outpost of Flamingo. There were great volunteers to receive us, a store, even showers, but all I wanted to do was leave. In the ultrarunning world there’s a saying admonishing you to “beware the chair” when you enter an aid station. The idea being you’re exhausted, you sit, you eat and drink, and then choose the chair over completing the race. I had thought about getting some sleep but Flamingo was the chair in this context, so we got out of there as quickly as we could.

After that I smelled the barn and got impatient to cover the final 35 miles to Key Largo. My impatience (and maybe a little hubris) was met with the often-shallow waters of Florida Bay that demand careful navigation, a headwind, and what felt like an outgoing tide – it was going to be a long night.

In hindsight, this is when several things conspired against us. My partner was tired but grinding as only a veteran of many grueling races can. I, on the other hand, was running on maybe a quarter tank of fuel with many miles left to go. The wind came on as the sun went down. I took waves to my face more than once as I marked our slog against a constellation to my left. Progress was incredibly slow but we kept at it, paddling hard and clawing our way forward.

We eventually made it far enough to get some protection from the backside of an island. I felt the rush of accomplishment and pride at getting through the rough patch. The lights of Key Largo were finally visible in the distance. Yes, we’ve got this! Let’s go! There’s nothing quite like the exhilaration one feels at accomplishing a goal.

That is until you start hallucinating and get all turned around, mired in shallows in the middle of a windy night with a thunderstorm coming in. At least it wasn’t cold! We had inadvertently gotten off our GPS track and found ourselves stuck in mere inches of water going on for what seemed like forever. At multiple points we were literally dragging our canoe through knee-deep mud in an easterly direction knowing (hoping?) that we’d eventually hit deeper water.

After battling like this for hours and my fuel gauge on just about empty, we finally got into some decent water and paddled into Key Largo. The end of the race is a small beach hotel that looks just like all of it’s neighbors. It was barely 6am and all was dark, so it took a bit of work to find but we were greeted quietly by a couple of friends and then off to bed for some much-needed rest.

Ultimately, my EC experience was grueling and sublime. The physical test was easily outweighed by the psychological. I wanted to quit so often and had come up with elaborate ways to justify this but I’ll never know how serious I was. Frankly, how could I quit anyway when it would probably take me longer to get “rescued” than to just keep paddling. So do what you set out to do. I eventually trained myself to counter negative thoughts by finding something beautiful to look at, which was easy because there were so many. Cloud formations, light on the water, spoonbills in flight, an open horizon.

Saying yes launched me into the unknown. Would I still have said yes if I knew what I was getting into? I like to think so. Saying yes is all about getting out of my comfort zone and finding adventure in ways large and small. Testing myself and expanding what I think is possible. My patience, persistence, and intestinal fortitude were stretched and I more or less overcame some of my foibles to get the job done. I’m proud of that.

I’m not trying to tell you how to live your life and I hope you don’t mind me sharing my story. And I’m not advocating doing crazy stuff under the banner of “I just say Yes all the time”. Instead, maybe make it a goal to say yes to something that peaks your interest but your rational mind initially scoffs at. The size and scope of your yes doesn’t matter. Whatever it is, and even if there’s some pain involved, there’s power in saying yes that’s hard to find elsewhere in life. Good luck wherever your yes leads you!

Have questions? Ask us. We can help.

Good morning all. I typically write these blog posts on Mondays and finish them up the following morning. Unfortunately I overscheduled myself yesterday and need to skip this week's post. We'll be back at it next week. Until then, take care and have a great day!

- Brandon

Tax season is frustrating for lots of people. Our system is incredibly complicated and, perhaps ironically, only gets more so when we’re doing what we’re supposed to be doing like working hard, saving, investing, and so forth. Still, we have to tally everything up once a year and pay our share to keep the lights on, or so they tell us.

According to a 2021 survey by the IRS more than half of American taxpayers use a paid preparer to file their returns. Most people I know have a “tax person” and this also seems true for most of my clients. Personally, I did my family’s taxes for years using TurboTax but shifted to using a CPA about ten years ago when I started this business. Coordinating business and personal tax, and doing it well and accurately, is hard and I’m happy to pay a professional to do it for me.

Other surveys indicate that maybe 60% of people would prefer to do their own taxes with good software and a simpler system, so there’s DIY interest out there. Various websites suggest doing your own taxes when they’re “simple” and paying someone when your details are “complicated” – how helpful is that when it’s all complicated? And just because we want to do something doesn’t mean that we can or should. I’m sure I could spend time doing my taxes but I just don’t want to. It’s easily worth it to pay someone to do the sausage making but I still try to understand all the numbers and strategy.

One example of the issues a potential DIYer has is the complexity of the data and documents they have to use to complete their return. There are lots of tax forms but let’s look at a couple of the most common in my industry, the 1099 Composite and 1099-R.

By the way, I don’t intend this post to be a super-detailed examination of each form. Instead, this is more of a shorthand way to look at them along with the sections and numbers I often look at as a financial planner.

Let’s consider the 1099 Composite:

As the name implies, this form includes an array of tax-related data such as dividends, interest, and gains and losses for taxable (not IRAs, Roth IRAs, or otherwise tax-deferred) accounts.

Schwab and other brokerage firms need time to review transactions made in their system and transactions and other data from investment providers like mutual fund companies. This data sometimes comes in late or gets revised after the tax year has closed. It’s for this reason that Schwab does two runs of these forms, the first in late January into early February and the second, for more complex accounts, in mid-February.

Assuming your accounts are at Schwab and also assuming they spent some time at TD Ameritrade last year, you’ll be getting two 1099 Composites for 2023, one from each company. The formats are different but the essential data is the same.

Delivery of these forms is usually electronic but you can have a paper copy mailed to you if that’s your preference.

Schwab’s 1099 Composite contains forms such as the 1099-DIV, the 1099-INT, and the 1099-B showing realized gains and losses. Those forms start the document after a couple of intro pages and then you’ll see summaries of each maybe midway through. These summaries aren’t reported to the IRS like the individual forms are. However, I like to look at the summaries first because they’re a little easier to follow.

For example, you can jump ahead to page 23 of 55 where summaries begin in the sample document below. But I often will jump ahead to page 31 (again, in this sample – yours may have fewer pages) to look at gains and losses first. I’ll review the totals to ensure accuracy and then work backwards to confirm the individual transactions look right.

https://si2.schwabinstitutional.com/SI2/Published/Direct/public/file/p-11092758

I’ll look for any large and/or unexpected numbers. Does anything appear to be missing? Maybe cost basis is missing? The information you see has been sent to the IRS so if anything is wrong you’ll need to have Schwab generate a new 1099 – you shouldn’t make corrections on your own. Otherwise, the 1099 Composite is a useful tool for assessing taxable activity for the year and that’s pretty much it. The document won’t give you rate of return information or investment analysis, but a clean form should give your tax preparer all they need.

Now let’s look at the 1099-R:

As with the Composite above, you’ll receive two 1099-R forms if you were taking distributions from your IRA while at TD Ameritrade and then at Schwab. Dividends, interest, gains, losses, and so forth aren’t normally reportable each year when they happen within a retirement account. All the IRS cares about is money leaving the account and why, so that’s what’s on the 1099-R.

That might sound simpler than the Composite, but it’s still challenging sometimes. Page 54 of 63 in the link below shows this form in detail.

I look at Box 1 for the year’s Gross Distribution amount, Boxes 4 and 14 for taxes withheld, and then Box 7 for the Distribution Code. This latter box can be problematic because sometimes the custodian codes a distribution incorrectly. These codes can have different tax ramifications so getting them right is key.

Code 7 is probably most common since it implies a “normal” distribution (meaning you’re old enough to draw without penalty and no other issues apply). All this is taxable as ordinary income.

Codes 1 and 2 are less common because they imply an early distribution that’s taxable as ordinary income plus a penalty, such as Code 1. Code 2 indicates there may be a penalty exception.

Also interesting is the box for “Taxable amount not determined”. This usually comes up when clients donated money to charity directly from their IRA. The gifted dollars aren’t taxable but Schwab doesn’t differentiate so they punt by checking that box. This leaves it up to the account owner to tell their tax advisor about the charitable gift but the box being checked typically flags the tax person to ask about it in case you’ve forgotten.

Other codes exist but review yours and let Schwab or your humble financial planner know if it seems wrong. Don’t manually correct it since the document needs to be reissued if there was a mistake.

Hopefully this helps you understand these tax forms a little better. I’m happy to help with further questions but specifics are probably best directed toward your tax advisor assuming you have one.

Here’s the guide I mentioned above.

https://advisorservices.schwab.com/resource/guide-to-schwab-tax-forms

Have questions? Ask us. We can help.

Before we delve into today’s post, just a heads up that I won’t be posting next Monday as I’ll be out of the office.

On to this week’s post…

We’re getting deeper into tax season and that’s stressful for just about everybody. Yet another, perhaps larger stressor for some families right now is that we’re also entering college acceptance season. Some high school seniors have already received acceptance letters but most traditionally learn their fate from about mid-March to mid-April. Also traditionally students and their families are expected to choose a school by May 1^st. It’s an exciting time that’s been upended this year by our government that, ironically, was only trying to help.

I’m sure Congress passed the FAFSA Simplification Act a few years ago with all the best intentions. The Department of Education was directed to make the Free Application for Federal Student Aid process faster and friendlier, and aid eligibility calculations would be overhauled. This would help more students go to college without as much debt, and so forth. But as was perhaps inevitable, the new website and application process went through delays caused by development oversights and technical glitches. These issues have been referred to in the press as a “smorgasbord of errors” and, my personal favorite, as a “nexus of chaos”. The bottom line is that families began the process later than normal and, due to further delays, relevant financial information will be late going to schools by at least a month.

This creates the unfortunate and anticlimactic scenario where students open their acceptance letters to find little meaningful information about what attending Brand X University will cost them. Yes, there’s probably information in the envelope or email about the sticker price of the institution but nothing about specific aid awards. Net price calculators on school websites and elsewhere offer a school’s typical total cost of attendance, but those can be inaccurate. This can be due to old data, such as for the 2021-22 academic year in one case or, in another case, the “old algorithm” according to a school’s admissions rep. So the student is overjoyed at being accepted to their out-of-state dream school while their parents are left with the conundrum, “How can we afford this if we don’t know what it will cost”?

We’re dealing with these same issues in my household with our son. We completed the FAFSA process early and he’s been accepted to multiple schools, which is great, but now we’re playing the waiting game with everyone else. Maybe the “reach” school would be affordable if we knew how much aid was available, if any. Or maybe the hypothetically “cheaper” state school is a better and more affordable option anyway. It’s an odd thing to consider these weighty financial commitments with such limited information.

Parents and students are scrambling but so are schools. Ordinarily kids have until May 1^st to decide but some schools like the UC and CSU system in California have bumped this back to May 15^th. Other schools extended to June or later, while others haven’t but offer flexibility if the student asks for it. And some schools are using alternate means to send out aid estimates, so it’s all over the place. Either way I think it's best to call the school and ask instead of waiting. 

Unfortunately this FAFSA delay is compressing a set of difficult decisions into a very short timeframe. Along these lines and while we wait, here’s a fascinating update on college planning from JPMorgan. This is a slide presentation with all sorts of details pertaining to why college matters (it still does, I think – I know that’s up for debate these days…), cost, aid, the new Student Aid Index that replaces the old Expected Family Contribution and saving/investing for college.

Beyond that, I wish you and your family luck if you’re going through this process with your student. It’s a huge decision that’s very stressful for everyone involved, and not just financially!

Here’s the link to the slides…

https://am.jpmorgan.com/us/en/asset-management/adv/investment-strategies/college-planning-essentials/?nav=none&email_campaign=307390&email_job=466755&email_contact=003j0000018XcwiAAC&utm_source=clients&utm_medium=email&utm_campaign=ima-amer-529-02082024&memid=7220927&email_id=76965&decryptFlag=No&e=ZZ&t=613&f=&utm_content=College-Planning-Essentials

Have questions? Ask us. We can help.

Contrasting narratives about our strong economy post-Covid continue to mystify just about everyone. From the Federal Reserve on down it’s been interesting to watch how forecasts and opinions evolved over the past few years.

The economy was going to crash. We were supposed to be in a lengthy recession by now. High inflation was expected to be part of the new normal. And the government, overburdened by debt and intent on raising interest rates to fight inflation, was supposed to be the culprit.

Or… high government spending would be absorbed by the economy. There would be imbalances, but these would be overshadowed by a strong recovery coming out of the pandemic lows. Inflation and interest rates? Not to worry because we’re coming in for a soft landing…

How can these two diametrically opposed narratives exist at the same time while almost literally being at war with each other in the economy and culture? It’s fascinating.

There were selloffs in the markets, sure, but those happened amid a tide that still seems to be rising. That can’t last indefinitely so the trillion-dollar question is when the tide ebbs and nobody knows the answer with a high degree of certainty. Nonetheless, people seem certain of their opinions and they’ll only get louder as the year progresses. Just expect more volatility this year so you won't be surprised when it comes. 

Along these lines, I’d been thinking about the various camps that economic outlooks belong to when I saw this article in the WSJ and thought I’d share it with you. The author discusses three dominant narratives about why the economy is proving so resilient and how each leads to different investment implications.

A link is below if you’d like to read the whole article with charts, hyperlinks, etc.

From the WSJ…

Productivity is booming (buy Big Tech!)

Private-sector productivity, measured as output per hour, has been rising strongly since the first quarter of 2022 when the Fed belatedly started to increase interest rates. At the end of last year, it passed its pandemic peak, which anyway was a figment of statistics due to the distortions of the lockdown economy.

The bullish story is that productivity has been boosted by workers moving en masse to better-paid and more productive jobs. Rather than flipping burgers, recent graduates have been in demand as the economy runs hot and unemployment stays near half-century lows. 

Corporate investment has also rebounded much faster than it did after the 2007-2009 recession, now 10% higher than its prepandemic peak even when adjusted for inflation, against just 5% by the end of 2012, the same length of time from the 2009 low. The benefits of artificial intelligence, if they come through, might allow productivity to keep rising.

The bearish story is that productivity only rose because supply chains snarled by the pandemic were finally freed up, and that isn’t going to happen again.

The gains in productivity that have come through have allowed the economy to grow even as inflation comes down. If technology allows productivity to keep rising fast, the economy should be better able to resist higher interest rates—and stocks do well in the future even as the Fed keeps rates high.

The government financed everything, so of course it has been fine (sell Treasurys!)

Fiscal spending is also a good explanation for what happened. The Federal government ran a record peacetime deficit during the pandemic, and last year increased its deficit to 6.2% of GDP even as the economy grew strongly. Combine subsidies for anything with a hint of green with leftover stimulus savings and it is easy to see how the economy could resist higher interest rates.

Unfortunately, this can’t end well: Either the government will rein in spending, removing support and so most likely slowing growth, or it won’t, and higher borrowing will keep pushing up bond yields. Both are worth worrying about.

Monetary policy is taking longer than normal to bite (eventually it will, threatening growth)

The ineffectiveness of rate increases so far is obvious. Far from reducing demand, the economy grew faster as rates rose further. Much of that was just luck. But the risk is that the impact of rates on the economy hasn’t been abolished, merely delayed.

With hindsight, it is easy to see why higher rates didn’t immediately reduce corporate investment or household consumption. Big companies and homeowners had locked in record amounts of debt at record-low rates. Instead of Fed tightening hurting their income, major corporations and people with a mortgage kept paying the same rate but earned more in interest on their savings.

American nonfinancial companies are estimated by the Bureau of Economic Analysis to be paying about 40% less in interest, net of interest on savings, than they were before the Fed’s rate rises started. This shouldn’t be taken too literally, since recent data are calculated as the leftovers after adding up government, consumer and foreign interest, not measured directly. Still, assuming the direction of the data is right, it is the precise opposite of what the Fed’s been trying to achieve.

Not everyone in the U.S. benefited. The U.S. has a two-speed economy, something I’ll come back to in future columns. Small companies and those with poor credit ratings tend to have shorter-dated debt that needs to be refinanced at higher rates or have floating-rate debt. Individuals who borrowed on credit cards or to buy high-price secondhand cars are struggling, with delinquency rates now above prepandemic levels—and the young and poor have the biggest problems, according to the New York Fed.

As time passes and rates stay high, more and more debt needs to be refinanced. More borrowers who put off moving to avoid having to take a new mortgage at much higher rates will bite the bullet. More companies have to repay their bonds. And more economic activity that would have been financed by debt at lower rates just doesn’t happen.

For now, investors aren’t concerned that a delayed impact of higher rates will turn the two-speed economy into an overall slowdown. Even the worst-rated CCC junk-bond borrowers only yield about the same—13.5%—as they did in December 2019. Interest rates are higher, but offset by investors demanding a lower spread over safe Treasurys to compensate for extra risk.

The danger is that the mess in the slow-speed part of the economy drags down the rest. This could be transmitted via trouble in highly-leveraged private equity, commercial real estate or lenders such as regional banks particularly exposed to weaker borrowers. But it seems more likely just to be a slow burn as delinquencies and defaults steadily rise.

The problem for investors is that all three explanations of recent history are attractive and lead to completely different predictions if they continue to hold: Solid growth, government debt bomb or hard landing. 

In the past few months, the markets have swung from one extreme to the other, and back again. Expect that to continue. Nobody can get their story straight.

Here’s the link I mentioned. As before, let me know if you get blocked by the WSJ’s paywall and I’ll send you the article from my account.

https://www.wsj.com/economy/central-banking/the-confusingly-strong-economy-told-in-three-stories-dfd8b387?reflink=mobilewebshare_permalink

Have questions? Ask us. We can help.

I’ve received some questions about this and have recently gone down the decision road myself, so let’s talk about recasting your mortgage, how it works, pros and cons, and so forth.

What is a Recast?

Recasting a home loan isn’t refinancing. When you recast you’re working with the same loan terms, such as length and interest rate, while lowering your loan balance with a lump sum payment. Your lender then reworks your amortization schedule and lowers your monthly payment accordingly.

Here’s an example:

Say you’re five years into a 30yr loan with a $350,000 balance. At 3.5% interest your monthly principal and interest payment is about $1,796. If you paid $100,000 to the principal you’d now owe $250,000 with the same 25 years remaining. Your new payment would be $1,252, a savings of $544 each month for the life of the loan.

Why recast?

To save money, of course! The borrower in our simplified example would see their annual cash flow increase over $6,500 while also shaving off about $51,000 of interest expense if they made every loan payment. And you could potentially drop add-ons like private mortgage insurance if your loan-to-value ratio gets low enough, meaning more savings.

Here’s a good calculator to run an amortization schedule using your loan numbers. I’ve been using this guy’s site for years and it’s pretty straightforward.

https://bretwhissel.net/cgi-bin/amortize

Okay, so it’s clear why someone would want to recast but let’s consider the specifics.

You need to find out if recasting is possible since not all loan types and lenders offer this. My understanding is that FHA and VA loans don’t allow recasting, for example. Best bet is to reach out to your lender and ask.

Your lender likely has a minimum recast amount, such as $10,000 or maybe a percentage of your loan balance. Do you have that kind of cash sitting at the bank or maybe in a brokerage account? You won’t want to hit your retirement accounts for this so the cash has to be readily available.

There’s a processing fee and it takes a little time. My lender, Rocket Mortgage, had a $10,000 minimum, charged $250, and took about two billing cycles to lower my payment when I did a recast. And while they would have accepted a personal check I sent a wire transfer that cost $25, so add that cost as well.

Again, once the money is paid and the process completed you’re simply continuing your original loan terms but with a lower balance and payment. Recasting is really pretty simple but it’s not for everyone.

Here are some reasons why this may not work for you.

You don’t have an extra bundle of cash to put against your mortgage balance. Once you make the lump sum payment the only way to get the cash back is to borrow (assuming you qualify) or sell your home (assuming the market value remains high enough to cash you out). So this cash may be liquid now but it certainly won’t be when you’re recast is complete.

Also, while you can make extra principal payments on your loan anytime I don’t suggest paying a larger lump sum without first considering a recast. Doing so would save you interest expense over the long-term by paying your mortgage off early but would leave your contractually obligated payment the same in the meantime. Might as well reduce this too and give yourself some options since the recast expense is relatively low.

Your loan terms are bad, or at least not great. Maybe your interest rate is too high or maybe it’s an adjustable loan that you don’t intend to keep long-term. If so, maybe your financial situation has changed enough that you could refinance your loan instead of recasting. A good mortgage broker could help determine what you qualify for. If you think you fall into this category and have cash to put against your loan it’s reasonable to have a mortgage broker do a soft credit check so you can talk numbers. You could bring your cash to the refi to “buy down” your interest rate. And be sure to ask about the cost of any loan programs they mention. My recast cost $275 with the wire fee but the full cost of refinancing could easily be well over $5,000. Don’t make that decision lightly.

You’re not planning to stay in the home for at least the next five years. This is a facts-and-circumstances sort of thing but I suggest doing something else with your lump sum payment if this home isn’t a keeper.

You prefer maintaining your liquidity and, hopefully, are doing something productive with the money. My recast example used a 3.5% loan and a lot of homeowners are in that range now. You can buy 1yr bank CDs (at least right now) at about 4.9% and bond investments are there too with some potential upside (and downside but let’s be positive). Stocks have a higher expected return, of course, but I’ve always hated bringing stocks into comparisons like this because it’s really a different ballgame. Anyway, if the rate you’re earning on your excess cash is higher than your mortgage rate you may just want to ride that for a while. Or, like me, maybe you decide to keep liquid money working while also doing a recast – it’s great to have options.

Additionally, instead of a recast you could use extra liquidity to indirectly get more money into your retirement plan at work, fully fund your HSA, and maybe fund a 529 plan for your kids or grandkids. There are lots of options to consider and all are probably better than leaving a lump sum of cash to earn essentially nothing.

Ultimately, recasting a mortgage can be great for those who have a chunk of available cash, and a mortgage and home they prefer to keep a while. There are always other considerations but let me know if I’m missing anything important to you.

Have questions? Ask us. We can help.