How to cash out golden handcuff mortgage

Question

Like lots of folks I locked in a low interest mortgage a couple of years ago. If I don’t move there’s no problem but if I want to move and sell the house I’m forgoing a large financial benefit.

Is there any good way to either cash out that benefit or transfer it to a new mortgage on a different property?

Ideas:

• Stay in the house - obvious, but limiting
• Rent out the house - but this can be a hassle and makes the next purchase more difficult
• Buy my mortgage note from the bank at a discount - this works hypothetically but isn’t actually possible as far as I can tell
• Sell the house and have the buyer assume my mortgage - I think this is only available for some specialized mortgages
• Convince the bank to pay me out - this would be best but I’ve never heard of it

Are there any other good options?

Seems like I have a valuable asset that I should somehow be able to monetize.

(I was somewhat inspired by Matt Levine’s recent column)

Answer 1

You have a relatively cheap debt secured by your expensive asset. You can't keep the debt without keeping the asset. If you sell the house you'll have to pay off the mortgage first.

Banks have no interest in letting you keep the cheap debt when they can sell you a new and more expensive mortgage. As long as you comply with the note terms they can't call it, but any deviation will lead to banks' demand to repay the debt. On the other hand, they currently have a guaranteed stream of income in terms of servicing fee for a loan they most likely have sold off already.

You can try to extract equity with a second mortgage, but that would have the current higher rates.

So if you want to keep the mortgage, keeping the house is your only option. You'll probably have to rent it out, otherwise the insurance company will drop you which will trigger bank's call on the loan.

Consider though that higher rates keep prices lower. Once the rates go down to what they were two years ago the prices will skyrocket. So buying now will lock in a lower price and you can refinance later if the rates go down.

Answer 2

Normally, mortgages are tied to the property, so there's not a way to keep enjoying the low interest rate without continuing to own the property. The mortgage terms won't let you.

Perhaps there is some kind of trickery you can do to convert this loan to something else and if so I would love to hear it, but I'll proceed to answer as if there isn't.

Due to inflation (assuming 6%), the principal + interest (assuming 2-3%) checks you give to the bank in the future will, when added together, probably be worth less than the single check you would have to cut today (in early repayment) for principal only. Then there's also the advantage of having the money available for investments and emergencies. In a sense, the bank is now paying you to keep owing them money. Partly, this is because inflation compounds, but P+I don't, they're fixed payments. That's the risk the bank took when lending to you at those terms.

Financially, the simplest way to cash it out is to simply not pay off your mortgage early.

Of course, there is the fact that maybe you don't like your house anymore and want a change. Presumably, you would be paying down your existing mortgage early and simultaneously taking a second one (but now at a higher rate, like 6%) to buy the new house. You should consider the early repayment of your existing mortgage like an additional cost, similar to closing costs of the new mortgage.

It's not really golden handcuffs so much as the goose with golden eggs. By moving, you'd be slaughtering the goose. You're better off using this as an opportunity to save and grow your savings, and prepare to move when conditions change (either inflation drops and cheap low rate loans are available again, or housing prices drop and you've saved enough to buy one outright). For extra points, you can put the money in an interest bearing savings account in the same bank that lended to you. :)

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Here's an amortization table with real values added:

year    principal   interest    real_dollar real_payment    real_total
1       56.4        8.2         0.94        60.8            60.8
2       58.2        6.5         0.88        57.2            118.0
3       59.9        4.8         0.83        53.7            171.7
4       61.8        2.9         0.78        50.5            222.2
5       63.6        1.0         0.73        47.5            269.7

This is a simplified cases where you have 300k and 5 years left on the mortgage at 3%, and inflation remains at 6%. You can see that a 2038 dollar is only $0.73 2023 dollars, and consequently you'll end up paying 270k in all if you do the payments. If you close it out now, you'll have to pay 300k, 30k more.

Answer 3

Stay where you are. Keep the mortgage. Invest the money that the cheap mortgage is saving you. The returns on the investment are your additional profit. Basically, this is the safest opportunity you will ever have for a leveraged investment.