I listen to Motley Fool Answers every week and they always provide great insights about personal finance and what not. If you haven’t listened to their podcast, I definitely recommend it. Every episode is around a half hour and it’s both entertaining and educational.
Anyway, about a half year ago they were doing a mailbag episode and a guest host mentioned “recasting your mortgage” as a way to do reduce your mortgage payments. I initially thought he was just talking about refinancing your mortgage, but it was intriguing enough to do a quick search on Bing (Yes, you read that right! I’ve lost all credibility now, right? lol. I’ll have a post on why I use Bing later) to see what “recasting” was. Sure enough, I stumble upon an article that describes the process and I was like “Wow, how have I never heard about this before?”
What is a Mortgage Recast?
A mortgage recast is when you make a large lump sum payment to your mortgage and your mortgage lender updates your monthly mortgage payments to reflect the new principle balance (aka reamortizes your loan). The lump sum amount generally needs to be at least $5,000 but some lenders may require more, such as $10,000.
So basically, if you were paying let’s say $1,000/month in principle & interest on a $200,000 loan and you decide to make a one-time $10,000 payment, you could reduce your principle & interest payment by $50/month or so (depends on the interest rate).
A mortgage recast does not reset the clock on your mortgage terms either, meaning if you bought the property 5 years ago in 2015 and did a 30-year fixed mortgage, recasting your mortgage will still mean you will payoff your mortgage in 2045 just with lower monthly payments.
Benefits of a Mortgage Recast
The primary benefit of a mortgage recast is that it enables you to reduce your monthly mortgage payment without spending a lot of on bank fees to do so and without resetting the clock. The cost or fees on a mortgage recast is generally around $200-300 (I paid $250 for mine) versus the closing costs of a refinance is around $2,500 to $3,000. There are also secondary benefits in that it doesn’t take nearly as long, generally just a few days and very little paperwork. It also doesn’t require a credit check.
Why do a Mortgage Recast?
So why do a mortgage recast? Why not just refinance your mortgage? Well first off, you might want to simply reduce your monthly mortgage payments and a recast is a really easy way to do that especially if you have some cash just sitting around. Moreover, a mortgage recast is a surefire way to earn X% return for your cash where X is your interest rate. So if you have a 4% interest rate on your loan, then you effectively are getting 4% back since you’re reducing your principle a lot which will reduce the amount of interest you will pay for the life-time of the loan.
You may also want to do a mortgage recast if interest rates are higher than your current rate or are around the same rate you currently have since in my opinion, it doesn’t really make sense to refinance unless you’re getting a materially lower interest rate (generally 0.5% or more i.e. going from 4% to 3.5%). I could be wrong on this, so feel free to chime in the comments if you have another POV.
Finally, a mortgage recast doesn’t reset the clock on your mortgage terms which is nice for those that were planning to have theirn mortgage paid off by a certain date.
Differences between Mortgage Recast vs. Refinance
Here’s a table of the differences between a mortgage recast and refinance
|Mortgage Recast||Mortgage Refinance|
|Interest Rate||Stays the same||Adjusted to new rate|
|Duration of Loan||Stays the same||Starts over as a new mortgage|
|Costs||$200-$300||$2,000 to $3,000|
|Time it takes||1-2 weeks||45-60 days|
|Time to Breakeven||< 1 year||Generally 1-3 years|
|Lump Sump Required||Yes, $5k+||Optional|
My Experiences with Recasting my Mortgage
So I had an opportunity to recast my mortgage this year on my rental property. I had a pretty solid return in the stock market through January (before COVID really impacted the stock market) and decided to pull some of the gains to reduce my monthly mortgage. I called up my bank and they told me that I could reduce my monthly mortgage by nearly $700/month by making a large lump sum payment.
So I decided to do just that. I spoke with a representative and gave them permission to debit the lump sum from my checking account and then they sent me some paperwork to fill out. It was a super easy process and it took probably at most 2-weeks to do (When I say 2-weeks, it was basically me just waiting for them to process the paperwork, my part literally took 1 hour at most). The only annoying part about the whole process was the need to get some of the documents notarized.
As noted, it only cost $250 to do this mortgage recast and within 2 weeks, my next mortgage bill was $700 less which was great! It felt really good to do that especially since the stock market started imploding shortly after my mortgage recast.
My Experiences with Refinancing my Mortgage
I’ve refinanced a few properties in my life and I will admit it’s kind of a chore since there’s a lot of paperwork to fill out and documentation that needs to be provided and sometimes by a certain date which can be difficult for those that don’t have a lot of flexibility during normal bank hours. It also takes a long time (generally 45-days) and you’re peppered with additional requests throughout the process.
I’m actually going through a refinance right now and while it will greatly reduce my monthly mortgage payment (I decided to do another large lump sum payment on top of getting the lower interest rate since I wanted to lock-in additional gains from my investing), it’s just frustrating since there’s a lot of fees and not a ton of transparency on each fee. (i.e. Why the heck do I need to pay $3 for a title policy and $103 for a recording fee? On top of the other fees that are way more than the $3). I personally think I’m very well-versed in understanding a lot of this stuff but even still, it can be incredibly confusing. The part I’m mostly referencing is that I decided to lock in at an interest rate of 3.125% and the mortgage rates have been fluctuating a lot lately since my lock-in due to certain economic factors impacting the 10-year treasury yields.
I asked the bank if I could potentially get a lower interest rate when I saw “nationwide rates had dropped to sub 3%” and then all my lender threw all this jargon at me about how the basis points needed to be at a certain amount where it would offset the credit I currently have, yada yada. I tried to ask him to lay out in layman’s terms and still, he could not! I don’t understand why it’s so difficult to state, “the interest rate needs to be at X% before we can lock you in at a better rate.” It’s like he was almost making excuses about why I couldn’t get a lower rate or something by making his answer incredibly long-winded. I would be perfectly fine if he had just said “Not possible.”
At the end of the day, both a mortgage recast and a refinance can greatly help your financial situation. A mortgage refinance definitely takes more time to “break-even” due to higher closing costs but when the rate difference is 0.5% or more, it can really help reduce your monthly mortgage payments. I personally think if you have a high loan amount (greater than $250k) and you can save at least 0.5%, it would probably be worth it.
However, if you’re just looking to use that recent bonus or some cash just sitting on the sidelines to reduce your monthly mortgage payments without any major changes to your mortgage terms, a mortgage recast might make more sense. I definitely think a mortgage recast going forward will be my go-to especially since I’ve locked in at a really low rate.