Interest-saving mortgage modification: "recasting"

[Freedom2016]

DH and I are considering recasting our mortgage, a little-used but totally legit "trick" that costs less than a refi but can save interest paid over the life of the mortgage. Re-casting is basically re-amortizing the loan at its current balance, at the same APR, and without changing the length of the loan.

Curious if anyone else has looked into, or done a recast?

[Another Reader]

Not all banks/servicers offer recasts.  I thought about doing one of the rentals, but then HARP 2.0 came along and I refi'd into a much lower rate instead.  The servicer was IndyMac, and they are not around any longer.  If the interest rate and costs were low enough to be advantageous compared to a refinance or if I was not eligible to do a refinance but was to do the recast, I would certainly consider it.

[arebelspy]

DH and I are considering recasting our mortgage, a little-used but totally legit "trick" that costs less than a refi but can save interest paid over the life of the mortgage. Re-casting is basically re-amortizing the loan at its current balance, at the same APR, and without changing the length of the loan.

Curious if anyone else has looked into, or done a recast?

I'm not sure you understand recasting a loan, or maybe I don't.

Same loan balance and interest rate and length = same interest amount paid.

Where does recasting save you interest?

From what I understand, it can lower your payment (say, if you repaid some of the principal early), but you'll still pay the same interest overall as if you didn't recast it (but still paid the principal early - that's the part that reduces the interest paid - recasting or not doesn't)...

[Freedom2016]

As I understand it (and maybe I'm wrong)?....

If you recast the loan but keep your monthly payment the same, you shorten the life of the mortgage by some amount and save interest that way.

OR you can reduce your monthly payment to improve cash flow, but then you don't save interest in the long run.

I may have phrased it incorrectly in my original post.

[Indio]

I looked into recasting my mortgage with Wells Fargo. They told there was a $250 fee associated with doing it and that this is a one itme only option, never to be available again. I had to make a lump sum payment of at least $20k in order to reduce my monthly payment without having to refi or pay any other closing costs, etc. I already pay extra toward the mortgage so I didn't hink it was worthwhile to tie up the $20k. If I had a windfall and wanted to reduce the mortgage significantly, then I would likely do it.

[taekvideo]

Recasting WILL save you on interest in the long run, just not as much as a normal early payment.
For example, if you pay off half of what's left of your loan in one lump-sum payment with a recast, then it'll reduce your monthly payments in half, and the total interest you pay over the remaining term will also be cut in half.
If you were to repay half of the remainder of the loan as a normal early payment, then you'd save significantly more than half of the interest.

This assumes no fees of course... fees can easily make recasting not worth it (or even regular early payments for that matter, at some banks).

[frugalnacho]

I agree recasting won't save you any interest.  If you've already paid a portion of your principal down it can reduce your monthly payment, but the interest will be the same overall if you keep the same payment schedule.  If you lower your monthly payment (and don't pay extra each month) you will actually end up paying more interest.

For example you take a $100,000 mortgage and have a payment of $800/mo, and you immediately pay $50,000 off the principal, your next payment will still be $800, but more of it will go towards principal now and you will pay it off way ahead of schedule.  If you recast it will lower the monthly payment by re amortizing over 30 years.

[arebelspy]

Indeed, that's a good point frugalnacho, not only does recasting not save you on interest, you may end up paying more.

Plus any fees you pay will mean more money paid overall than if you didn't recast.   You can only save interest by: 1) Paying more than your minimum (prepaying principal) or 2) Paying sooner (prepaying principal) or 3) Getting a lower rate.

Recasting does none of these things.

Thread title is misleading.

If you recast the loan but keep your monthly payment the same, you shorten the life of the mortgage by some amount and save interest that way.

Then just don't recast, just keep paying your monthly payment.   You'll finish at the same time, whether you recast in that scenario or not, so by recasting you'll just pay the fees to do so for no reason. 

[taekvideo]

I agree recasting won't save you any interest.  If you've already paid a portion of your principal down it can reduce your monthly payment, but the interest will be the same overall if you keep the same payment schedule.  If you lower your monthly payment (and don't pay extra each month) you will actually end up paying more interest.

For example you take a $100,000 mortgage and have a payment of $800/mo, and you immediately pay $50,000 off the principal, your next payment will still be $800, but more of it will go towards principal now and you will pay it off way ahead of schedule.  If you recast it will lower the monthly payment by re amortizing over 30 years.

If you take out a $100k loan... then pay off $50k right away and recast, it'd be the same as you just getting a $50k loan in the first place, and obviously you'll pay less total interest on a 50k loan than a $100k loan... exactly half as much in fact.

I'm not saying recasting is a good idea (mostly due to fees), but it does save on interest.

[arebelspy]

I agree recasting won't save you any interest.  If you've already paid a portion of your principal down it can reduce your monthly payment, but the interest will be the same overall if you keep the same payment schedule.  If you lower your monthly payment (and don't pay extra each month) you will actually end up paying more interest.

For example you take a $100,000 mortgage and have a payment of $800/mo, and you immediately pay $50,000 off the principal, your next payment will still be $800, but more of it will go towards principal now and you will pay it off way ahead of schedule.  If you recast it will lower the monthly payment by re amortizing over 30 years.

If you take out a $100k loan... then pay off $50k right away and recast, it'd be the same as you just getting a $50k loan in the first place, and obviously you'll pay less total interest on a 50k loan than a $100k loan... exactly half as much in fact.

I'm not saying recasting is a good idea (mostly due to fees), but it does save on interest.

No.  It doesn't.

Prepaying the mortgage saves on interest.

If you then recast that won't save you any interest versus not recasting the loan.  It will just cost you the fees.

Prepay the 50k and don't recast.  Recasting will only lower your payment.  It won't save you interest.

[frugalnacho]

I agree recasting won't save you any interest.  If you've already paid a portion of your principal down it can reduce your monthly payment, but the interest will be the same overall if you keep the same payment schedule.  If you lower your monthly payment (and don't pay extra each month) you will actually end up paying more interest.

For example you take a $100,000 mortgage and have a payment of $800/mo, and you immediately pay $50,000 off the principal, your next payment will still be $800, but more of it will go towards principal now and you will pay it off way ahead of schedule.  If you recast it will lower the monthly payment by re amortizing over 30 years.

If you take out a $100k loan... then pay off $50k right away and recast, it'd be the same as you just getting a $50k loan in the first place, and obviously you'll pay less total interest on a 50k loan than a $100k loan... exactly half as much in fact.

I'm not saying recasting is a good idea (mostly due to fees), but it does save on interest.

I think you are wrong.  Interest is a function of the APR and the principal you owe and that is it.  A 100k loan that is paid to 50k immediately will still have scheduled payments calculated at the 100k principal (you are only getting charged interest on what you actually owe though). 

Some real numbers:  100k loan, 5% APR
mortgage:  $536.82/mo for 360 months (30 years)

If you pay an extra 50k on the first payment, all subsequent payments will still be $536.82 (though more of it will go towards principal since you paid the principal down some).   That means you will have the mortgage paid off on payment #119 (just under 10 years) with a total interest of $13,752.53 paid.

If you recast the loan after the first payment of $50,000 + $536.82 (of which $416.67 goes to interest) you will have a new loan balance of $49,879.85 re amortized over 30 years.  Your new payments will be $267.77, and if you actually stick with that payment and pay it off over 30 years you will pay more in interest.  If however you pay an additional $269.05 on each payment (making your total mortgage payment $536.82 each month - the same as the 100k loan) you will pay the mortgage off on payment #118 (plus the 1st payment you made before you recast).  You end up paying $13,335.86 in interest (plus the $416.67 on the 1st payment for a grand total of $13,752.53 in interest).  It's exactly the same amount of principal, interest, and number of payments.   Which makes sense because it's the exact same APR and you held the loan for the exact same length of time.

All recasting does is stretch out the length of the loan, you keep the same APR.  If you owe the same amount of money, and stretch the term of the loan back out to 30 years, but still have the same APR all you are doing is lowering your payments so you are effectively borrowing the same amount of money for longer, which means you'll pay even more interest. 

You will not, and can not save money by recasting.  If you want to save money then you need to prepay your principal or refinance to a lower APR.

[taekvideo]

Lol I was saying paying $50k early and recasting saves you interest versus not paying $50k early at all.... sorry if that wasn't clear.
I did already say that making a normal $50k early payment would be better than a 50k recasting early payment ^^

[Freedom2016]

Indeed, that's a good point frugalnacho, not only does recasting not save you on interest, you may end up paying more.

Plus any fees you pay will mean more money paid overall than if you didn't recast.   You can only save interest by: 1) Paying more than your minimum (prepaying principal) or 2) Paying sooner (prepaying principal) or 3) Getting a lower rate.

Recasting does none of these things.

Thread title is misleading.

If you recast the loan but keep your monthly payment the same, you shorten the life of the mortgage by some amount and save interest that way.

Then just don't recast, just keep paying your monthly payment.   You'll finish at the same time, whether you recast in that scenario or not, so by recasting you'll just pay the fees to do so for no reason.

You're right - I posted the thread when I was still trying to figure out what re-casting was and it looked, at first, like it was a sure way to save interest. Now that I've run the numbers for our particular situation, I realize it's not. Sorry for the confusion!

[frugalnacho]

Lol I was saying paying $50k early and recasting saves you interest versus not paying $50k early at all.... sorry if that wasn't clear.
I did already say that making a normal $50k early payment would be better than a 50k recasting early payment ^^

Recasting doesn't save you any money though.  Putting an extra 50k down in the down payment and making your mortgage 50k less will have the exact same effect as getting a mortgage 50k too large, immediately paying 50k off and recasting it (assuming there are no recasting fees).  The savings is from un-borrowing that 50k @ x% APR, not from recasting.

[train_writer]

Hmmm, recasting is the common practice for Dutch annuity mortgages, and it DOES save money and improves flexibility I can assure!

But then, the monthly mortgage payment here is automatically adjusted WITHOUT additional COSTS. I think that makes all the difference.

Example
- 30 year mortgage (time line remains)
- minimum payment (annuity) 750
- One time downpayment of 3000 euros in year 2
- New minimum payment becomes 720, but let's say you keep on paying 750 as long as you can afford it, the minimum payment keeps on getting lower and lower every month. This 'method' of recasting is actually a very nice way for the lower/middle income mustachians to allow both flexibility (because minimum mortgage payment keeps going down) and have a bit of a snow ball effect on the mortgage.

I do agree that with this strategy, it is at a certain point more financial wise to either just pay off your mortgage (when the lump sum is getting low and the years still > 20, for example) or stop recasting.

[Beaker]

But then, the monthly mortgage payment here is automatically adjusted WITHOUT additional COSTS. I think that makes all the difference.

Oh wow. I wish we had that in the US!


So when would recasting actually make sense? Seems like one case might be if your retirement savings/investments wouldn't cover the current payments but you've paid down enough that the lower, post-recast payments would be workable.

[taekvideo]

Lol I was saying paying $50k early and recasting saves you interest versus not paying $50k early at all.... sorry if that wasn't clear.
I did already say that making a normal $50k early payment would be better than a 50k recasting early payment ^^

Recasting doesn't save you any money though.  Putting an extra 50k down in the down payment and making your mortgage 50k less will have the exact same effect as getting a mortgage 50k too large, immediately paying 50k off and recasting it (assuming there are no recasting fees).

It's just a difference in terminology. You're considering recasting to be just the reduction of the payments.. and if that's the case then yeah what you're saying is right.
But since you can't recast without a substantial early payment, I consider that early payment to be a part of the recasting process.

The savings is from un-borrowing that 50k @ x% APR, not from recasting.

I think of recasting as exactly that... un-borrowing that amount of money.

But then, the monthly mortgage payment here is automatically adjusted WITHOUT additional COSTS. I think that makes all the difference.

Oh wow. I wish we had that in the US!


So when would recasting actually make sense? Seems like one case might be if your retirement savings/investments wouldn't cover the current payments but you've paid down enough that the lower, post-recast payments would be workable.

Yeah that's one case... or somebody who lost their job temporarily and already had a lot of early payments.
It can also be useful for the self-employed, or people with seasonal employment.... any job where your income isn't consistent month-to-month... you can pay down extra on good months and have reduced obligations on the worse months (and end up paying less total interest than if you simply held extra cash in a savings account to help on bad months).

[arebelspy]

You're considering recasting to be just the reduction of the payments.. and if that's the case then yeah what you're saying is right.
But since you can't recast without a substantial early payment, I consider that early payment to be a part of the recasting process.

Right.  That is the case, it's just a reduction of payments.

You wouldn't recast without having paid down more, but you can pay down more without recasting.  And doing that saves you the extra interest.  The recasting doesn't change anything but lower your payment.  And that doesn't save you interest.

You prepay principal, and that saves you money.  Recasting subsequently doesn't.  That early payment doesn't have to be part of the recasting process.

The savings is from un-borrowing that 50k @ x% APR, not from recasting.

I think of recasting as exactly that... un-borrowing that amount of money.

Right, but that's not what recasting is.  That's what prepaying principal is.. unborrowing of that money.  Recasting just reamortizes based on your current principal amount.

Yeah that's one case... or somebody who lost their job temporarily and already had a lot of early payments.
It can also be useful for the self-employed, or people with seasonal employment.... any job where your income isn't consistent month-to-month... you can pay down extra on good months and have reduced obligations on the worse months (and end up paying less total interest than if you simply held extra cash in a savings account to help on bad months).

No doubt there's cases where it makes sense to recast to lower your monthly payment, for the same reason there's cases where it makes sense to have a 30-year mortgage over a 15-year mortgage.  But those cases are about having a lower payment, not about saving money.

:)

[train_writer]

No doubt there's cases where it makes sense to recast to lower your monthly payment, for the same reason there's cases where it makes sense to have a 30-year mortgage over a 15-year mortgage.  But those cases are about having a lower payment, not about saving money.
:)

True, but it is also saving money, because of the rent on the downpayment. (I do agree that it is not a lot).

In the case one continues with the original agreed monthly (or bi-weekly) payments, you can save money more substantially and allow even more flexibility. In my case
- Original monthly payment: 750
- 2 downpayments of 3500 euros in first 1.5 year. Recasted
- New minimum payment is 690
- I keep paying 750, so the new minimum payment is ever getting lower. If I keep that up, I essentially have the same result as someone who did not recast but shortened the mortgage time. If i for some reason can't keep paying the 750, I have a lower obligation or I make it easier to rent out the house and keep more of the rent revenue. I think it makes sense from a flexible life perspective and financial perspective for your flexibility portfolio ;)

[arebelspy]

Again, the recasting is fine, and gives you flexibility, but it doesn't save you money, prepaying the principal does.  (It, in fact, costs you money with the fees.) Don't confuse the two.  It can make sense to pay more for that flexibility.  I prefer 30-year mortgages over 15. And that is one of the reasons.

But recasting to create a lower payment is not an interest saving technique, which is what we're discussing,