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I have a fixed-rate home mortgage and a T-bill ladder that is contractually guaranteed to earn exactly the monthly payment on the mortgage, regardless of market rate changes. How can I reattach the mortgage from the home to the T-bills? (The reason to do this is of course to then get someone else to assume the mortgage and T-bills at a fair price, without selling my home.)

The mortgage holder should be absolutely thrilled by the huge reduction in risk. (Currently they are effectively insuring my home. Homeowner's insurance has numerous exclusions and doesn't cover true rebuild cost, regardless of coverage limits.) How do I make this transaction with the mortgage holder?

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    what happens to the value of the ladder if the interest rate changes? Commented May 30 at 16:11
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    @mhoran_psprep The value of the ladder fluctuates in a roughly similar manner as the mortgage. But this is irrelevant because the mortgage holder doesn't have the right to get all their money back in one shot. What matters for contractual purposes is that the ladder is guaranteed to cover the monthly payments no matter what happens. I've updated the question to make this point clearer. Commented May 30 at 16:14
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    I added a united-states tag on the basis it seems like you are asking a question specific to that. The answers might be very different in different places around the world so please comment or edit if I've got that wrong.
    – Vicky
    Commented May 31 at 7:14
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    It's not clear to me that T-bills whose interest happen to equal the monthly mortgage payment could necessarily serve as collateral equal to the house - the T-bills simply may not be worth that much. Say you have a $100k mortgage, a $500 payment, and $90k of T-bills earning $500/month. Suppose your home insurance lapses and the bank wants to call in the loan - they can't get their money back. I don't really see how guaranteeing you'll make the monthly payments has anything to do with the collateral of the loan. Commented May 31 at 14:15
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    @personal_cloud You say "the mortgage holder doesn't have the right to get all their money back in one shot", but it's rather common that they can. Lenders can usually call in a loan if you violate its terms, usually by not paying the monthly amount, but also if you don't insure the property, or use it for something you're not supposed to, or are supposed to live in it but don't. Commented May 31 at 14:17

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There are not standard mechanisms that I am aware of to "swap out" the collateral for a mortgage, let alone to assign t-bills as collateral. Some other thoughts on why this would be difficult:

  1. in order to use T-Bills as collateral for a mortgage, the bank would need to have some legal protection for taking ownership of the bills in the case of default. With mortgages this is done via a lien on the title that prevents transferring ownership without the express permission of the lien holder. I don't know if it is possible to attach a lien to T-bills to prevent you from selling them. It certainly isn't something that's as common and streamlined as the current mortgage lien process is.

  2. Banks often sell mortgages to other companies to package the loans into mortgage-backed securities, where investors buy pools of thousands of mortgages and collect a share of the payments. A mortgage with a non-standard collateral would be much harder to pool with other mortgages, regardless of the "lower risk".

  3. From the bank's perspective, their only concern is that the homeowners insurance covers the balance of the mortgage, not the replacement cost. If your insurance does not cover replacement cost, that' your risk, not the bank's. They will get their money before you get what's left over to start rebuilding or buying a new house.

I would be shocked if any bank would be willing to go through the effort of setting all of this up. A local bank is going to have more flexibility to do strange things than a large national bank, though.

If you just want to get rid of the lien on the house, you could just sell the t-bill ladder, apply that lump sum to the mortgage, and pay off any remainder very quickly. Or just set up automatic payments so that the income from the bonds flows to the banks more smoothly.

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  • I've seen some smaller banks offering cash-secured loans; that is a good suggestion. Paying off the mortgage would be a good deal if the bank would give me a fair price. However right now my bank is quoting a payoff amount that is just face value, which is 5 points above market! I think a small bank might be motivated to split the difference to make a quick 1-2 point profit. Commented May 30 at 16:37
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    If the bank still owns the mortgage (rather then just servicing it), then yes they may be willing to settle for less than face value if you offer to give them more then they would get for selling the loan to another bank, If they don't own the loan anymore then there's not much they can do.
    – D Stanley
    Commented May 30 at 16:43
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    Note that settling for lower than face value would likely be taxable also - they are essentially "forgiving" the remaining balance.
    – D Stanley
    Commented May 30 at 17:07
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    Indeed, so-called portable mortgages where the underlying property collateral can be swapped out for a different piece of property collateral are very uncommon in the US. I would imagine that a mortgage where the underlying property can be swapped out for an entirely different class of asset are all but unheard of. Commented May 30 at 17:22
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    "Can you explain why this would be an issue for a bank that's only servicing the mortgage?" because they cannot change the terms of the mortgage at all - certainly they can't change the collateral. You're basically asking them to "buy" the ladder from you and use that to make the mortgage payments (and remove the lien, I assume). That's not a standard practice at all that a bank would readily accept.
    – D Stanley
    Commented May 30 at 17:28
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I think the answer is to tell the bank you want to take out a new loan secured by the T bills and use that to pay off the mortgage. That's basically how refinancing works, except in that case the paid-off house becomes collateral for the new loan.

Of course this only makes sense if the bank will give you a better rate for the new loan than it did for the mortgage. Especially since mortgage interest for your primary residence may be tax-advantaged and the new loan's interest probably wouldn't be. There may be other reasons to prefer one over the other; make sure you know all the implications of this change before asking for it. Even if it's possible it may not be wise.

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  • This is a great idea, I just don't know if a regular bank would do it. Commented May 31 at 3:00
  • Most banks will let you pay off a mortgage early. As to whether they would issue you a loan secured by a bond ladder... More likely they'd give you a loan secured by bonds, since they don't want to operate the ladder and they don't want to trust you to do so. Whether this is actually advantageous worries me more.
    – keshlam
    Commented May 31 at 3:46
  • Part of the scenario is that the present value of the bond ladder is less than the balance of the loan (due to higher interest rates). The OP is hoping to either get the collateral replaced with the less valuable ladder because the income offsets the mortgage payments, or for the bank to settle the loan for less than the owed amount.
    – D Stanley
    Commented May 31 at 13:35
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    Hope springs eternal. I'm not optimistic.
    – keshlam
    Commented May 31 at 14:03
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How can I reattach the mortgage from the home to the T-bills?

First of all if the loan isn't secured by the house, it isn't a mortgage. That means the interest you are paying on the loan isn't deductible. If you are counting on being able to deduct the interest this would be a major hit to your finances.

If the loan isn't a mortgage then the risk model the lender uses doesn't match what the lender is expecting. My local credit union will do a personal loan backed by certificates of deposit. The bad news is that they charge you 2% above the CD rate, and the loan term matches the term of the CD. The maximum amount you can bowwow is the value of the CD. Even a loan backed by a CD doesn't match what you want to do.

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