Recast or Invest the Lump Sum?

There is a version of this argument that runs on vibes: "the market averages seven percent, your mortgage is six and a half, so invest." It sounds close enough to be true and it is wrong in three separate ways at once — the tax, the risk, and the fact that the average is not a promise. But there is a better version, and it starts from a number that can be checked. Model both routes properly, over the same period, and the return at which investing catches up to recasting comes out at 6.44% on a 6.5% mortgage. That is not a coincidence and it is not a metaphor. A recast is a tax-free, risk-free investment that pays your mortgage rate, and the arithmetic agrees.

The short answer

If your after-tax investment return is below your mortgage rate, recasting wins. Above it, investing wins. At 6.5% against 7%, investing wins by about $17,000 over 27 years. At 6.5% against 4.25% in a savings account, recasting wins by $40,000.

The interesting part is not which side of 6.5% you land on. It is that the line sits at 6.5% at all — the rate you already know, printed on your statement, guaranteed by contract, and not subject to a bad decade.

The rate you are actually comparing against

Most comparisons make a category error: they put the mortgage rate next to a stock market average and call it like for like. Those are different kinds of number.

Your mortgage rate is contractual. It is fixed for the remaining term, it does not fluctuate, and it cannot be revised because the market had a bad year. A recast converts cash into a payment reduction at exactly that rate, with no intermediate risk at any point.

A market return is an average across decades and across investors, with a distribution around it. It includes years of minus 37%, years of plus 28%, and long stretches where nothing happens. The average is real, and it is also not available to anyone who needs the money at a particular moment.

So the honest comparison is: a certain 6.5%, against a distribution whose mean is around 7% and whose variance is large. Those are not the same offer, and treating them as equivalent is where most of the bad advice comes from.

The model, run properly

Take $50,000, a $320,000 balance at 6.5% with 27 years left, and a $300 recast fee. Both routes run for the full 324 months, at which point the loan is gone either way and only financial assets remain. In the recast route, the $327.78 monthly saving is invested as it arrives, because that is what the saving is for.

The crossover is at 6.44%. Your mortgage rate is 6.5%. The 0.06 point gap is the $300 fee and the fact that the recast's benefit arrives monthly rather than as a single deposit.

Read that again, because it is the whole page: the break-even return is your mortgage rate. Not a rule of thumb, not a market average — the number on your statement.

The asymmetry nobody puts in the table

The table above is pre-tax on both sides, which flatters investing and understates the gap.

Interest you do not pay is not income. It never appears on a tax return, is never taxed as a gain, and does not care about holding periods or capital gains brackets. A recast's return is tax-free by construction, and permanently so.

Investment returns are not. Long-term capital gains get 15% or 20% depending on income, plus the 3.8% net investment income tax above the threshold, plus state tax in most states. Sell to spend the money and the tax is certain; hold and the tax is deferred, which is worth something but not everything.

Correct for 15% and the required market return becomes 7.65%. Correct for 23.8% and it becomes 8.53%. Both are plausible long-run equity returns. Neither is a number you can plan a mortgage payment around.

Where investing genuinely wins

It would be dishonest to leave this section out, because there is a real structural advantage on the investing side and it is not small.

A recast's benefit is linear. You remove $50,000 of principal, you save interest on $50,000 for the remaining term, and that is the end of it. The saving does not grow, does not compound, and does not reinvest itself.

Five thousand dollars invested compounds. The gains earn gains, and over 27 years that geometric growth is what produces the difference between a 6.5% contract and a 7% average. Above the crossover point, investing does not just win — it wins by an accelerating margin, as the 8% row shows.

This is why the answer flips for anyone with a 3% mortgage. At 3%, no realistic after-tax return is below your rate, and a recast is simply a bad trade: you would be paying off the cheapest money you will ever borrow. The rule is not "recast is better". The rule is "compare against your own rate".

Why the monthly saving is half the return

Here is the part most comparisons omit entirely, and it changes the answer.

The recast's return is not the $56,200 of interest saved. That figure is the interest that never gets charged, and it is real, but it is only half the story. The other half is the $327.78 a month that is now free, and what happens to it.

If it is invested, the recast route in the table above wins at any return below 6.44%. If it is spent — absorbed into a slightly nicer life, which is what happens to most payment reductions — the recast's return falls to the $56,200 alone, and investing wins comfortably at almost any plausible rate.

That is the honest risk in the recast case, and it has nothing to do with markets. It is behavioural: a payment reduction is invisible if you let it be. The borrowers who do well from a recast are the ones who automate the difference into an account on the same day the new payment starts.

What the seven percent does not tell you

The 7% figure is a long-run average of a volatile series, and the distribution matters more than the mean when the money is committed for decades.

From 2000 to 2009, a broad US equity index returned roughly minus 10% for the decade. Someone who invested a lump sum in 2000 and needed it in 2009 had less than they started with. From 2010 to 2019 the same index returned over 13% annually. Both decades are inside the average, and neither felt like the average while it was happening.

A recast has no such distribution. It pays 6.5% in every scenario, including the ones where the market falls 40% and you lose your job in the same year — which is exactly when a lower required payment is worth the most.

That is the trade being offered: a known 6.5% against an uncertain 7%. Anyone who prefers the second has a defensible position, and should be honest that they are being paid about half a point for accepting variance, illiquidity during drawdowns, and the discipline to not sell at the bottom.

How to decide

Compare your mortgage rate to what the cash would earn after tax in something you will actually hold for the full period. Not what it could earn, and not what an index averaged — what you will hold.

If your rate is above that figure, recast, and automate the monthly difference into an investment account the same week the new payment starts. That combination is what produces the numbers in the table.

If your rate is below it — anything in the 3s, or a 4.5% loan against a 5% Treasury — keep the cash, keep the loan, and treat the mortgage as cheap leverage. A recast in that situation destroys value, and no amount of "debt-free" satisfaction changes the arithmetic.

And if you are not going to invest the monthly difference, be honest about it before you decide. The recast still wins against a savings account. It loses against the market. The difference between those two outcomes is not the fee, the servicer, or the rate — it is whether the money gets moved.