Author Topic: Mortgage Recasting  (Read 13500 times)

Verdo

  • 5 O'Clock Shadow
  • *
  • Posts: 24
Mortgage Recasting
« on: August 29, 2014, 09:41:11 AM »
I have heard bits and pieces on recasting and while on the phone with my mortgage company today the rep mentioned it. 

As of now I dump extra cash against the principle amount every month and recasting appears to be a good way to accelerate the mortgage paydown.

The way I understand it, is that if the original loan amount was 200k for a 30 year fixed, and 2 years later I had paid it down to 175k, I could also throw a few extra bucks at it and recast, leaving recasted payment based on the (175k + a few extra bucks) for the next 28 years.  This would reduce the monthly payment amount, leaving X amount of dollars in my pocket that I could also use to add to the amount I pay in extra principle every month, accelerating the payoff.

Does this make sense? And I'm curious if anyone here has ever been through the process and if it is as great as it appears.

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3700
  • Age: 44
  • Location: USA
Re: Mortgage Recasting
« Reply #1 on: August 29, 2014, 10:29:44 AM »
I haven't used the process, but I'm somewhat familiar and it can help you pay down a mortgage or free up cash flow. It might not be your best bet though.

What are your current mortgage terms? You might be able to do a lot better overall with a refinance. Hard to know without details.

If you're interested in paying it off early, switching to a 15 yr loan will drastically reduce the interest rate and help accelerate the process.

If you're interested in cash flow and an overall improvement to your net worth, consider getting the lowest 30 yr rate possible, then paying only the minimum and aggressively investing any extra cash.

Read more here: http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

Jack

  • Magnum Stache
  • ******
  • Posts: 4725
  • Location: Atlanta, GA
Re: Mortgage Recasting
« Reply #2 on: August 29, 2014, 10:36:09 AM »
Recasting would reduce the total amount you would be obligated to pay each month, but if you were planning to continue to pay extra I'm pretty sure it would have absolutely no effect since the interest rate stays the same.

  • If you've already paid down part of your mortgage ahead of schedule, but now have changed your mind and want to string it out as long as possible (because it's a low interest rate and your dollars are better invested elsewhere), recast (or maybe refinance to a new 30-year fixed).
  • If you want to continue paying your mortgage down quickly and are reasonably sure you'll be able to continue to pay extra each month consistently, refinance to a shorter term with a lower interest rate and higher minimum payment.

Verdo

  • 5 O'Clock Shadow
  • *
  • Posts: 24
Re: Mortgage Recasting
« Reply #3 on: August 29, 2014, 10:39:51 AM »
I haven't used the process, but I'm somewhat familiar and it can help you pay down a mortgage or free up cash flow. It might not be your best bet though.

What are your current mortgage terms? You might be able to do a lot better overall with a refinance. Hard to know without details.

If you're interested in paying it off early, switching to a 15 yr loan will drastically reduce the interest rate and help accelerate the process.

If you're interested in cash flow and an overall improvement to your net worth, consider getting the lowest 30 yr rate possible, then paying only the minimum and aggressively investing any extra cash.

Read more here: http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

Rate is 3.625 30/yr which I doubt I'll be able to find anything lower.  I like having the lowest possible payment for the loan amount without being tied to a higher payment that a 15 year would require. 

I split the amount I invest and pay extra against he loan for piece of mind and have ready up quite a bit on the benefits of both.  I already pay 1250 extra every month on the mortgage and so if what I'm assuming is correct, if I have to pay only a few bucks to recast, it is a win-win and will only benefit with no downside. 

Also, if something were to hit the fan, otherwise I don't think I'd have any problem paying the min amount on the mortgage.

The main goal is cash flow.  I'm thinking the improved cash flow benefits could be used to add to the 1250 extra I already put down every month, and if I decided I need cash flow for my pocket, or for investing as well, I could always steer it that direction.  Again, better cash flow is the goal, and paying off the mortgage quickly is part of that equation for me.
« Last Edit: August 29, 2014, 10:41:31 AM by dvirden »

Verdo

  • 5 O'Clock Shadow
  • *
  • Posts: 24
Re: Mortgage Recasting
« Reply #4 on: August 29, 2014, 10:57:12 AM »
Looking at a mortgage calculator with the ability to account for additional payments it looks as if:  I were to recast every year, say 9/1, and all the while making extra payments, I would roughly reduce the principle owed by 20k, it would reduce the amount of principle per monthly payment by roughly $50 give or take, or an additional $600 in my pocket or Vanguard account each year.  Extremely rough estimate but I'd say that adds up over time...

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3700
  • Age: 44
  • Location: USA
Re: Mortgage Recasting
« Reply #5 on: August 29, 2014, 11:00:05 AM »
I agree with Jack then:

Recasting would reduce the total amount you would be obligated to pay each month, but if you were planning to continue to pay extra I'm pretty sure it would have absolutely no effect since the interest rate stays the same.

If your main goal is cash flow, I don't understand how recasting changes anything. Let's say you pay $2,250 ($1,000 regular + $1,250) now and you recast. Assume it changes your regular payment down to $850, so now you have an extra $150 to add to your $1,250 for a total extra payment of $1,400. Now your new payment is $2,250 ($850 + $1,400) which is the same as the old one. The only thing it really accomplishes is slightly reducing your required minimum payment. That's a good thing I guess, but likely not worth the ~$300 re-casting fee (that was just a guess at the cost).

It would give you a little flexibility. It would give you greater piece of mind having a lower required minimum payment. This is a good thing since you are still required to make this payment if you lose your job, all the way until the loan is paid off.

If that's your goal, go for it! It sounds like you know what you're doing and have read up on the subject quite a bit.

If it were me, I would keep your current mortgage and pay it as slowly as possible, but that's just me. YMMV. Take a look at this discussion between starguru and I from yesterday if you're interested: http://forum.mrmoneymustache.com/ask-a-mustachian/is-your-mortgage-rate-over-4-5/msg383073/#msg383073

Verdo

  • 5 O'Clock Shadow
  • *
  • Posts: 24
Re: Mortgage Recasting
« Reply #6 on: August 29, 2014, 11:08:40 AM »
I guess what I have assumed is there is no cost to recast and that usually there is only the requirement to pay a lump sum towards the principle which of course would be a no brainer.  Better the cost be equity for me and not a fee for them.. but that is only an assumption which is why I am hoping someone who has gone through it can shed light on it for everyone.

The rep I talked to on the phone is going to send me the information on their requirements for recasting and I will post as soon as I get that in the mail.

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3700
  • Age: 44
  • Location: USA
Re: Mortgage Recasting
« Reply #7 on: August 29, 2014, 11:12:34 AM »
I know someone who paid off their house. Then they wanted to do $75K in upgrades/improvements/repairs. Their banker didn't want a loan for < $100K, so he told them they'd get a better rate taking a $100K mortgage, then waiting a week, paying off $25K, then recasting. That's what they ended up doing, and IIRC they paid a small fee in the $200-$400 range for the re-casting.

I'm looking forward to hearing what it costs. Whatever you do, you're doing some good things. Nice work.

dandarc

  • Walrus Stache
  • *******
  • Posts: 5222
  • Age: 40
  • Pronouns: he/him/his
Re: Mortgage Recasting
« Reply #8 on: August 29, 2014, 11:29:52 AM »
Where I could see this being valuable is if you shifted plans in a big way - went from paying off mortgage as a big goal to a strategy of holding mortgage a long time and investing the difference.  This would free up more cash-flow to invest in addition to simply not paying any extra.

train_writer

  • Stubble
  • **
  • Posts: 203
  • Location: Brussels
Re: Mortgage Recasting
« Reply #9 on: August 29, 2014, 03:07:26 PM »
In the Netherlands, recasting is free and done automatically if you make an extra payment towards the principal (instead of shortening the time of the mortgage).
I like it very much, as it allows me to change my mind on paying off the mortgage early and to make sure the 'minimum monthly amount' is at a comfortable low level. I can still pay off early, but also decide to just continue with the lower monthly payments. Maximum freedom!


If you happen to have your mortgage financed at ING bank in the USA, they should only charge administration costs of 15-25 dollars to make a simple and 'once' recasting. I don't know how it works at other financers.


My situation
Original minimum monthly payment in 2013: 751 euros
Principal payment 1 recast (Feb 2014): new minimum 735 euros
Principal payment 2 recast (June 2014) : new minimum 710 euros

I plan on making a large principal payment in November, which will bring the minimum payment down to 670. Somehow, psychologically, this lower obligation immediately increases peace of mind!

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28443
  • Age: -998
  • Location: Seattle, WA
Re: Mortgage Recasting
« Reply #10 on: August 29, 2014, 03:13:29 PM »
Mortgage recasting does not save you money.

It may cost you money (due to costs involved in getting it).

It adds flexibility, but it cannot save you money.

In essence, if you go to a smaller payment, and send that extra money to the new mortgage balance, it will pay off at the same time as if you just paid the larger payment (as the same amount will go to interest, as the balance is the same, and the same amount will go to the principal as in the example where you recast and send "extra" to the principal).

It won't save time, or money, on your payoff.

Previous discussion on the topic here:
http://forum.mrmoneymustache.com/welcome-to-the-forum/interest-saving-mortgage-modification-'recasting'/
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Verdo

  • 5 O'Clock Shadow
  • *
  • Posts: 24
Re: Mortgage Recasting
« Reply #11 on: August 29, 2014, 03:33:53 PM »
Mortgage recasting does not save you money.

It may cost you money (due to costs involved in getting it).

It adds flexibility, but it cannot save you money.

In essence, if you go to a smaller payment, and send that extra money to the new mortgage balance, it will pay off at the same time as if you just paid the larger payment (as the same amount will go to interest, as the balance is the same, and the same amount will go to the principal as in the example where you recast and send "extra" to the principal).

It won't save time, or money, on your payoff.

Previous discussion on the topic here:
http://forum.mrmoneymustache.com/welcome-to-the-forum/interest-saving-mortgage-modification-'recasting'/

Just glanced over that.  But, say I have paid down the mortgage to where by making the required payments, and have 25 years left.  Does recasting re-set the loan to 30 years or does it figured based on 25 years? 

When I look at it, I makes more sense that it be based off the 25 years in which case all of the extra payments between year 25-30 would result in additional savings in the form of the difference between the old minimum payment and the new minimum payment less the fee which is recouped over X amount of time, and the interest saved by applying that difference to the additional payment I'm already making on the loan. 

Then again I could be completely wrong.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28443
  • Age: -998
  • Location: Seattle, WA
Re: Mortgage Recasting
« Reply #12 on: August 29, 2014, 04:34:34 PM »
Just glanced over that.  But, say I have paid down the mortgage to where by making the required payments, and have 25 years left.  Does recasting re-set the loan to 30 years or does it figured based on 25 years? 

Irrelevant.

If you are sending the same amount of money to the same starting mortgage balance at the same rate, it will pay off at the same time.

It doesn't matter what your minimum payment is, or if that mortgage is spread out over 30 years, 25, or 5 years.

When you recast, if you keep sending in the same amount of money as you did before, it will pay off at the same time as it would have before.

Let me make up some numbers to show you.

Let's say before recasting your payment is $1000, and 500 is going to principal and 500 interest.  You recast and it makes your new (lower) payment be 700, of which 500 is going to interest and 200 to principal.  It will now take more time to pay off, but you tou take that extra 300 from your lower payment and apply it to principal.  You're in the exact same spot you were before recasting.

Recasting does not save you money.  There's no magical money appearing from somewhere.  You're just lowering your payment, but the balance when you recast is the same as the balance at the time if you DIDN'T recast, so at the same interest rate, the same amount will go to interest.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Thegoblinchief

  • Guest
Re: Mortgage Recasting
« Reply #13 on: August 29, 2014, 05:15:20 PM »
Why the hell are you prepaying a loan with interest that low?

Cheddar Stacker

  • Magnum Stache
  • ******
  • Posts: 3700
  • Age: 44
  • Location: USA
Re: Mortgage Recasting
« Reply #14 on: August 29, 2014, 10:00:04 PM »
Why the hell are you prepaying a loan with interest that low?

+1. I indirectly asked/advised the same thing. Look at reply #3 tho. At least he has read up on the topic. I think he knows what he's doing. But 30 yr 3.625% is an insanely good deal. I would pay $5,000 hard cash to get that deal. Maybe $10,000. And I wouldn't consider paying a dime earlier than required. But, maybe he knows something we don't.?.

Bob W

  • Magnum Stache
  • ******
  • Posts: 2942
  • Age: 64
  • Location: Missouri
  • Live on minimum wage, earn on maximum
Re: Mortgage Recasting
« Reply #15 on: August 29, 2014, 10:29:41 PM »
Since this site is somewhat opposed to debt I would suggest you sell the note on the home.  It's confusing but you don't own the home,  you have a long term contract to pay for it.  This is commonly called a mortgage.  The bank owns the home and is renting it to you.  Read your mortgage agreement.  IMO one should not mortgage a home unless theyhave the cash to pay for it outright.   You can probably lease a home for less and definetly reduce your risk.                      Let's say you pay a mortgage for 20 years then you can't make the payment and can't  sell.   Bank gets house and you lose what you paid.   Let's say the house value goes down 50% as we have seen in 08,09.   Can you afford to lose that much money?  A mortgage is like buying stock on a margin account.  Fine if you have the cash.  And a truism to remember.  "You don't own a house, it owns you"

agent_clone

  • Bristles
  • ***
  • Posts: 250
  • Location: Australia
Re: Mortgage Recasting
« Reply #16 on: August 29, 2014, 10:34:41 PM »
Personally there are only a few situations that I can think of where I would consider recasting, generally I would prefer to just pay the loan off faster (Note we do not have the low fixed interest rates that you guys have in the US).
1) A significant longer term drop in income and I am in front of the mortgage by a significant amount such that recasting would be beneficial
2) I had kids (no plans to) and I needed the extra money each fortnight/month/whatever versus paying off the mortgage earlier.
3) Interest rates have gone up to 10%+ and the mortgage repayments would be impacting flexibility in what I do with my money.  I have an offset account so the difference in interest shouldn't be too different, but if they get up that high the repayment amount would be closer to what I spend each month than I would prefer.  That being said, I expect that by the time they get up to 10% again then I should be earning more.

I don't really see the benefit in recasting versus just paying off the mortgage...

Joel

  • Pencil Stache
  • ****
  • Posts: 882
  • Location: California
Re: Mortgage Recasting
« Reply #17 on: August 30, 2014, 09:45:36 AM »
In your case, I think it makes sense to recast the mortgage IF you decide to put all of the extra money to your investments and no longer pay anything extra on the mortgage since it is at such a low rate.

JoJoP

  • Bristles
  • ***
  • Posts: 261
Re: Mortgage Recasting
« Reply #18 on: August 30, 2014, 09:59:24 AM »
I recast a loan on a rental house.  This house was purchased at the peak of the market,. and no way- no how does it cash flow.   It's also at a fairly high interest rate (6.25%).  But it is strategically located between some other property that we own (it's in the middle), so we swallowed the loss of value and we're keeping it.   The original loan was a $333K,  30 year fixed.  I had been making small additional principal reduction payments (100 or so), but decided to really tackle this debt in our FI quest.  I paid a 50K chunk and asked for recasting.  The recasting fee was $250, so not very much in the scheme of things.   I'm paying an extra $1000-1200 a month now, and it should be paid off in 5 years. 

The benefit to me is that by paying the same amount(the amount of the previous payment) , I am getting the debt paid off, but, on paper, it frees up obligatory cash outflow/debt servicing. So, basically, it keeps me qualified for more loans if I need them to buy another rental.  It also gives me some flexibility... I could make a lower payment if I needed to.  So if, for instance, I had an unexpected expense, a vacancy, or needed to regroup after buying something else, then I have flexibility to pay less for a month or two, instead of marching towards a quick payoff with my extra $1000 a month payments. 

When they recast, the push the loan out to the original date.   They don't add time, just re-amortize the current balance out to the original pay off date.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28443
  • Age: -998
  • Location: Seattle, WA
Re: Mortgage Recasting
« Reply #19 on: August 30, 2014, 02:56:10 PM »
Why the hell are you prepaying a loan with interest that low?

+1.

Completely different issue.  If OP wants to prepay, that's fine.  Some people value debt free over more money/volatility.

But if they want to go debt free, pay down the current loan.  Recasting at the same interest rate will only cost them money.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Verdo

  • 5 O'Clock Shadow
  • *
  • Posts: 24
Re: Mortgage Recasting
« Reply #20 on: August 30, 2014, 03:31:41 PM »
Why the hell are you prepaying a loan with interest that low?

+1.

Completely different issue.  If OP wants to prepay, that's fine.  Some people value debt free over more money/volatility.

But if they want to go debt free, pay down the current loan.  Recasting at the same interest rate will only cost them money.

Just worked this all out on a spreadsheet and did find that it will not improve any interest savings beyond what is already paid extra on the mortgage.   It does however improve cash flow if one were to stop making extra payments and recast, but that is the only benefit, cost being the fee to do so.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28443
  • Age: -998
  • Location: Seattle, WA
Re: Mortgage Recasting
« Reply #21 on: August 30, 2014, 03:55:37 PM »
Just worked this all out on a spreadsheet and did find that it will not improve any interest savings beyond what is already paid extra on the mortgage.   It does however improve cash flow if one were to stop making extra payments and recast, but that is the only benefit, cost being the fee to do so.

Exactly.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Thegoblinchief

  • Guest
Re: Mortgage Recasting
« Reply #22 on: August 30, 2014, 05:34:46 PM »
Why the hell are you prepaying a loan with interest that low?

+1.
Completely different issue.  If OP wants to prepay, that's fine.  Some people value debt free over more money/volatility.

Since the advice about recasting was pretty much settled, I wanted him to at least question WHY he was prepaying at all - hence the challenging question. But yes, clearly many folks value being debt-free over greater returns.

Verdo

  • 5 O'Clock Shadow
  • *
  • Posts: 24
Re: Mortgage Recasting
« Reply #23 on: August 30, 2014, 06:39:57 PM »
Mostly psychological and cash flow. I plan to get even more aggressive to get the house paid off 3-4 years from now.

JoJoP

  • Bristles
  • ***
  • Posts: 261
Re: Mortgage Recasting
« Reply #24 on: August 31, 2014, 08:07:23 AM »

[/quote]

Just worked this all out on a spreadsheet and did find that it will not improve any interest savings beyond what is already paid extra on the mortgage.   It does however improve cash flow if one were to stop making extra payments and recast, but that is the only benefit, cost being the fee to do so.
[/quote]

I know this in theory, because you are still paying xxx interest on xxx balance, but can you help me get my mind around it? 

frugaliknowit

  • Handlebar Stache
  • *****
  • Posts: 1686
Re: Mortgage Recasting
« Reply #25 on: August 31, 2014, 10:16:33 AM »
If you're concerned about cashflow, either:

1.  Stop paying "extra" until your emergency fund is comfortable, then resume extra payments.

or

2.  Take out a home equity line.

Even if your mortgage is held in the bank's portfolio, my guess is they are going to soak you to re-cast (wouldn't you if you were the bank!).  Banks often say you "can do this" or "sure, you can do that..." in general, but when it comes time to deliver there's plenty of excuses to not deliver or to charge "an arm and a leg".  Most of the fine print is "one-sided" (guess whose side?).

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28443
  • Age: -998
  • Location: Seattle, WA
Re: Mortgage Recasting
« Reply #26 on: August 31, 2014, 10:36:52 AM »
I know this in theory, because you are still paying xxx interest on xxx balance, but can you help me get my mind around it?

What part is confusing to you?
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

CanuckExpat

  • Magnum Stache
  • ******
  • Posts: 2995
  • Age: 40
  • Location: North Carolina
    • Freedom35
Re: Mortgage Recasting
« Reply #27 on: August 31, 2014, 05:06:32 PM »
Do lenders really charge fees that high to re-cast?
I had thought about this as a future possibly, to free up some cash flow, while keeping the interest rate I like. They didn't make it easy to find out about re-casting, but when I inquired with my lender it turned out that there is no fee. On the other hand, they will only do it if you are paying down at least 1/4 of your outstanding balance..

BlueHouse

  • Magnum Stache
  • ******
  • Posts: 3952
  • Location: WDC
Re: Mortgage Recasting
« Reply #28 on: September 12, 2014, 08:16:26 AM »
Why the hell are you prepaying a loan with interest that low?

+1.
Completely different issue.  If OP wants to prepay, that's fine.  Some people value debt free over more money/volatility.

Since the advice about recasting was pretty much settled, I wanted him to at least question WHY he was prepaying at all - hence the challenging question. But yes, clearly many folks value being debt-free over greater returns.
I'm also toying with the idea of recasting.  The reason is because I'm uncomfortable with the amount of my house payment. 
1. I don't have cash to pay off the house completely.
2. My current job situation provides me more than enough to pay my monthly payment comfortably.
3.  My current job situation / pay rate is higher than normal in my industry.  If (when) I lose my current client, I expect it will be very difficult to find another client that pays this rate for extended periods. 
4.  I would like to reduce my minimum required payment to something I could afford to pay even if my salary were reduced by ~100k/year.  I'd like my monthly payment (PITI) to be closer to $1.5k/month rather than $3.5k.
5.  I have a lot (not enough) of FU money, but if my mortgage were smaller, then I'd feel like I could go out and get ANY new job -- not constantly worry about how to pay the mortgage. 




arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28443
  • Age: -998
  • Location: Seattle, WA
Re: Mortgage Recasting
« Reply #29 on: September 12, 2014, 10:56:05 AM »
Makes sense.  There are reasonable reasons for recasting and paying the associated fees; sounds like your case may be one of them.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.