Author Topic: Mortgage Recast - Are my assumptions right?  (Read 1013 times)

Beach_Stache

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Mortgage Recast - Are my assumptions right?
« on: August 02, 2019, 05:55:15 PM »
So I'm in the process of refinancing our 30 year mortgage at 3.75% to a 15 year mortgage at 2.99%.  We have been paying down the payments aggressively so we are 6 years in and have about 8 years to go.  With the refinance we're still saving a few months at the lower interest rate if we continue with the same monthly payment, so I figured why not.

Through conversation with the loan officer he explained a mortgage re-cast to me as a great way to pay down faster if that's what we wanted to do.  He said you could re-cast as often as you want and it's only a $100 fee.  He briefly explained that the rate stays the same but for example if my original loan is $260k and at the end of year 1 of paying down a bit more principal with extra payments if it's at $230k then I'm paying the 2.99% on the $230k which would reduce our mortgage payment by around $200/month.

I figure if I re-cast every year and then whatever the savings is (i.e. $200/month first year) I just apply that amount towards principal the following year and then re-peat, re-casting at the end of each year and then whatever the mortgage monthly savings are, just keep putting that much extra towards principal each month.

I did a few searches and the examples of re-casting are not great and when comparing against just putting that extra money towards principal as a 1 time deal it shows that it's better to just put the money towards principal rather than re-cast, however I think that's based on the assumption that if you re-cast you just pay less each month, whereas in my case I'd be basically paying the same amount every month until our loan is over, just applying the re-cast savings additionally towards principal.

Do I have it right or am I missing something?  The examples showed a large "lump sum" payment made once and going off of those examples.  In my case I don't want to may lump sum payments, I just want to send an extra $1k/month towards principal each month to pay down the balance and then re-cast each month on that lower balance.

Has anyone ever done this and does it make sense to re-cast each year at a $100 fee, or did I get my assumptions wrong?

secondcor521

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Re: Mortgage Recast - Are my assumptions right?
« Reply #1 on: August 02, 2019, 07:20:08 PM »
Do I have it right or am I missing something?  The examples showed a large "lump sum" payment made once and going off of those examples.  In my case I don't want to may lump sum payments, I just want to send an extra $1k/month towards principal each month to pay down the balance and then re-cast each month on that lower balance.

Has anyone ever done this and does it make sense to re-cast each year at a $100 fee, or did I get my assumptions wrong?

I think you have it wrong.  All recasting does is adjust the monthly required payment amount down so that the remaining loan balance is paid off at the end of the original mortgage term at the given interest rate.  The only benefit it has to anyone is a lower required monthly payment, which is only helpful if one is concerned about cash flow.  It doesn't sound like you're concerned about cash flow.

Extra or excess payments should be (and almost always are) applied to principal regardless of whether you recast.  The amount of interest you owe each month is simply the remaining balance times the interest rate; neither of those two numbers are affected by a recast.  So recasting will make zero difference as to how fast you will pay it off (actually it will have a slight negative effect, because if you pay $100 to recast, that is $100 that you could have paid towards principal but did not).

HTH.

TomTX

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Re: Mortgage Recast - Are my assumptions right?
« Reply #2 on: August 03, 2019, 12:06:35 PM »
Recasting doesn't save you any money/interest payments. It just reduces the size of the mandatory payment.

A waste of $100.

Beach_Stache

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Re: Mortgage Recast - Are my assumptions right?
« Reply #3 on: August 03, 2019, 02:15:16 PM »
So then the reduced payment is just paying more to interest than principal?  That's the part I'm having a tough time wrapping my head around.
If at year 2 the amount of the loan drops from $250k down to $230k and you re-cast and the monthly payments go from $1800 down to $1600, and you put the extra $200 towards principal, that doesn't reduce the overall amount of the loan faster?

So then if I'm on pace to pay an extra $1k more towards principal each month then it's better to just keep on that track and never re-cast, is that accurate?

It seems silly to even put extra payments towards principal at 2.99% on a 15 year, but we're maxing out 401k's and Roth's for a while as well as putting post-tax investments in, so I figure it's basically like putting money in bonds, it just frees me a bit earlier from having a mortgage payment.

TomTX

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Re: Mortgage Recast - Are my assumptions right?
« Reply #4 on: August 03, 2019, 05:30:45 PM »

If at year 2 the amount of the loan drops from $250k down to $230k and you re-cast and the monthly payments go from $1800 down to $1600, and you put the extra $200 towards principal, that doesn't reduce the overall amount of the loan faster?

Correct.

"Recasting" takes you from 28 years left on the loan to 30 years left on the loan and reduces the payments to match. You still owe the same money, you still have the same interest rate.

secondcor521

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Re: Mortgage Recast - Are my assumptions right?
« Reply #5 on: August 03, 2019, 06:11:50 PM »
@TomTX is correct.

You seem to think that recasting affects the amount of your payment which goes to interest and the amount of your payment which goes to principal.  It does not.

If you owe $230,000 on your mortgage and your interest rate is, say, 4%, then your next month's interest is going to be $230,000 * 4% / 12, regardless of if you recast or not and regardless of whether your payment is $1,600 or $1,800 or whatever.

...

Depending on your risk tolerance and how fast you'll pay the mortgage off, it may be worthwhile to consider paying the minimum on the mortgage, sticking everything else in taxable, and then in five years or whatever, cash out enough of the taxable account to pay off the mortgage in one fell swoop.

MilesTeg

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Re: Mortgage Recast - Are my assumptions right?
« Reply #6 on: August 03, 2019, 06:59:12 PM »
Recasting will cost you move, even if you keep paying at the original value.

Recasting is for reducing your monthly payment obligation, which can make financial sense for cash flow reasons.

We've looked at it in the past, but it always saves more money to pay a little more each month than to save up a lump of money for a recast (typically 10% of remaining owed is minimum accepted.

Beach_Stache

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Re: Mortgage Recast - Are my assumptions right?
« Reply #7 on: August 04, 2019, 05:41:30 AM »
Okay, got it, thanks.  I figured it sounded too good to be true when he explained it.  I'll just keep applying more to principal each month to pay it down faster.  It does seem silly on a 15 year note at 2.99% but I would like to get out of debt.  Thanks for the input everyone!

TomTX

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Re: Mortgage Recast - Are my assumptions right?
« Reply #8 on: August 04, 2019, 08:02:21 AM »
Okay, got it, thanks.  I figured it sounded too good to be true when he explained it.  I'll just keep applying more to principal each month to pay it down faster.  It does seem silly on a 15 year note at 2.99% but I would like to get out of debt.  Thanks for the input everyone!

You're welcome to get out of debt on feelings.

However, you are likely to have a better outcome by investing the difference in low cost index funds.

SweatingInAZ

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Re: Mortgage Recast - Are my assumptions right?
« Reply #9 on: August 05, 2019, 12:35:10 PM »
If you get offered a free recast, it's a no-risk way to make your mandatory payment lower.

I paid down a bunch of principal early in my mortgage. Then, just 2 years in, I read a bunch of articles and forum posts which led me to prefer NOT paying off my mortgage early (the rate is low, and I would rather have the money in my brokerage account for FU money, moving, and a future downpayment).

A couple of years after that, my lender offered a free recast. I took it, and now the difference between my old and new payment gets automatically invested in its own brokerage account.

If I do end up staying in this house, I'll consider paying it off when that account exceeds the remaining balance.