Author Topic: Recasting a mortgage instead of refinancing or shortening the mortgage period  (Read 6121 times)

train_writer

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In another topic about pro's and con's of paying off your mortgage, I mentioned the system of recasting. Well, not much responses followed but I skyped with a few American friends and did some investigation. I think recasting is especially interesting for Mustachians who like a bit more flexibility but also peace of mind.

What I found out:
- Almost all big financers offer recasting of loans and mortgages, you have to ask them personally about it, but it can be done without costs or with very minor fees like 6 dollars!
- In my situation, recasting is done automatically with every extra payment I make.

Recasting
- When paying off an extra amount above your minimum monthly payment, a new 'minimum' monthly payment is calculated instead of shortening the mortgage period.

- Example: 200k mortgage, monthly payment of 900. 30 years. End date in 2044.
- Extra payment of 5000 towards the principal
- New minimum monthly payment is recalculated to 868 per month

What I like about it is that I can throw a few hundreds or thousands here and there towards the mortgage untill a monthly payment will give me enough peace of mind*. At the moment, I invest monthly and pay off towards the principal every 4 months.

Your thoughts?

* Enough peace of mind for me = I think a monthly minimum payment of 450 euros per month or the equivalent of subsidized low cost housing.

vivian

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Our mortgage is eligible for recasting but only once. It does not happen automatically, but we have to ask for it. I believe many lenders offer it, but not necessarily on all types of loans they offer.

In terms of why someone would choose to recast rather than refinance, many people refinance to get a lower interest rate. A recast maintains your interest rate.

As for recasting v shortening the length of the loan, I guess it depends on what gives you more peace of mind. Knowing you will pay off the mortgage sooner can also offer peace of mind. To me, that might offer more peace of mind than just having a lower payment.

mc6

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Thank you so much for introducing me to this concept, Train Writer.  My original mortgage recast automatically with extra principal payments but when I refi-ed to Chase, they do not.  I contacted Chase and their fee is $500 to recast, so it may not be a worthwhile endeavor for me.  But one of the things I enjoy about the MMM forums is the introduction to financial tricks I have never heard of!

Rural

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Our land loan recast automatically with every extra payment. This worked out very well for us, because it allowed us to stop making any payments at all* during the last six or seven months of the push to finish building our house. We held on to the money as a reserve for building supplies, and then (since we didn't need the reserve) paid the land off in full the week after we got our certificate of occupancy.


*This worked because the loan was set up with a giant balloon payment at the end. We just used their tricks to our advantage. :-)

Indio

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I had never heard of this before so I checked with the Google to learn more about it and then called my mortgage company. It's an interesting way to lower the monthly payment. Wells Fargo, where I have my loan, has restrictions that you can only do it once over the life of the mortgage, there's a $250 fee associated with it and the payment has to be a lump sum of $20k. I will keep this in mind when I save up enough to drop the monthly payment significnatly. My taxes keep increasing so my monthly tax escrow is the bigger problem.

train_writer

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Pooh, I did not know the fines would be that high!
Can you try negotiating a bit harsher and just proclaim this and that institute (ING for example) provide this service for free?