Spend $100,000 windfall on new home

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Dear Dr. Don,
I bought a new home four months ago and currently have an existing mortgage with a $215,000 balance. I recently sold my previous home and have $100,000 cash. Should I put the money down on my home and request a recast? Should I invest the money in the market? Or, should I do something else? I want to make the right decision.
— Fred Finance

Dear Fred,
Asking your lender to recast your mortgage will reduce the monthly payment while keeping the same interest rate and loan term. Just making an additional principal payment of $100,000 won’t reduce your monthly payment but will shorten the loan term and reduce the total interest expense.

The lender may not allow you to recast your loan. If not, you’ll have to decide between refinancing and making the additional principal payment on the current loan. Make sure there’s no prepayment penalty provision on your mortgage before making that additional principal payment or refinancing.

You can use Bankrate’s mortgage calculator to figure out the new payment if you were to recast your mortgage, and the interest savings with the additional principal payment. You should compare the total interest expense of the two options.

The decision whether to invest in something other than real estate with the $100,000 depends on your total financial picture, your attitude toward risk in investing and whether you can easily afford the current monthly mortgage payment from your monthly income. Do you have an emergency fund? If not, carving out a piece of that $100,000 for that purpose makes sense.

In deciding whether to recommend paying down a mortgage, my rule of thumb is to not recommend additional principal payments if the homeowner expects to earn more after-tax on his investments then the effective interest rate on his mortgage.

You can estimate the effective rate on your mortgage by using Bankrate’s mortgage tax deduction calculator. This calculator assumes you get the full benefit of the mortgage interest deduction, which may not be the case if you don’t have many other itemized deductions on your return.

Having said all this, I think you should put the money into the house versus putting it into the market. You bought your new house before selling the old one. Now that the old one is sold, invest the proceeds into your current residence by either recasting your existing mortgage, making an additional principal payment or refinancing the loan.

To ask a question of Dr. Don, go to the “Ask the Experts” page, and select one of these topics: “Financing a home,” “Saving & Investing” or “Money.” Read more Dr. Don columns for additional personal finance advice.