I am currently 5 years into a 30 yr mortgage. I locked in a 3.375% fixed rate. Free money in today’s rate environment. I recently got quoted at 8.0% for a mortgage on a new investment.
I started to think about the NPV of my previous 3.375% loan to the bank given they can redeploy my loan balance at 8.0%.
My outstanding balance is just over $200,000 with 25 yrs remaining. I ran an NPV on the loan from the bank’s perspective to figure out the minimum amount of cash a rational bank would take as a loan payoff. At 3.375% the NPV is the $200,000ish outstanding balance. Which makes sense. At 8.0% the NPV is closer to $40,000.
Does this mean my bank should take $40,000 + transaction costs and frictions at minimum to break even on my loan assuming they can redeploy the funds in today’s rate environment?
Is there any precedent for banks taking less than the principal amount as a pay off? Where am I off in my thinking on this?
They’re likely going to say no unless they’re extremely cash strapped. Increasing their return on about $200k from 3% to 8% isn’t really meaningful, IMO.
Doubt it
Take a step back and think about the people who work in these positions (level of intellect and responsibilities) and who you would be negotiating with. How do you think they'd respond?
They won't.
From the bank's perspective: Having a 3.375% loan on your balance sheet when you could get 8% sucks. However, the loan is HTM, meaning the bank doesn't make a loss on your loan as long as you keep paying - at least it doesn't affect their CET1. If they were to accept your 40k, they would have to book a loss which sucks even more.
Just appreciate the loan you've got and invest your 40k in the S&P 500
You have a mortgage not a bond, unlike the bond markets that were raised for a certain amount of capital, if you sell ur house pay back ur mortgage most likely the next buyer puts a mortgage on the house too with the bank.
That's why mortages don't work
They’ll say no because they’ll assume you’re interested in moving to a new home and they’ve got the borrower by the balls when that happens.
You can always just buy a LT bond at a higher yield and use those payments to cover your mortgage payments.
If your question is whether or not you can pay down less than your principal amount before your loan matures then the answer is yes…I’m not sure why everyone here is saying no…if it is your own personal mortgage there shouldn’t be any prepayment penalties. If it’s an investment property then refer back to your commitment letter regarding prepayment
Bro, he is saying he wants the bank to accept the 40k as a full payment - not a partial payment - instead of the 200k required. His NPV calculation assumes that the HTM loan is AFS and the payment is equivalent to selling in the market for the borrower’s benefit. Which is a dream scenario unless the bank is almost insolvent and requires some cash.
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