Mortgage Recasting
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When we were thinking about buying a home last year, we considered it. I get semiannual bonuses and i moonlight. We were thinking about getting a mortgage at 2.53x salary on a physician loan, then working hard to get 20% equity in the first 12y and recasting to a more manageable monthly cost.
Thankfully, we decided to go Dave Ramsey and not buy until we had our Efund and we’re building a down payment while renting. Hopefully the market also softens.
Either way, I can see the utility of it. By the logic above, one should alway use leverage to invest.
Lordosis, every month your mortgage has a remaining balance. This represents the present value of all future payments over the remaining months. In a traditional early payoff the money goes towards reducing the present value but keeps the payments and interest rate fixed, making time the only factor that can be altered to reflect the new, reduced present value of the loan. So the loan gets paid off earlier. When you recast you pay down that balance to the same present value as with a traditional early payment. The time to payoff does not change, nor does the interest rate. Thus, the only factor that can be altered to make the new present value accurate is a new (reduced) payment.
I would never think to argue with you about loan amortization. I just want to make sure I am getting this right. It doesn’t sound like something I would do. I guess I do not see a way to make it useful.
“Never let your sense of morals prevent you from doing what is right.”
It’s really just as useful as an early payoff in a traditional sense. The return is the same but you see an immediate benefit in fixed cost reduction. Of the two I’d prefer the recasting for that reason. Say something happens to you from a disability perspective. If you’ve put additional money towards the loan in a traditional manner you’d still have the entire payment due until the steep drop off. With recasting you are now in a position to immediately weather the storm with better ease.
Two years ago we moved and purchased a home in our new city. We had a two week gap between closings where we owned two homes. Our original home had $350k of equity that we would put toward the new home, but with the timing issue we took out the large 15 year loan on our new house (minus $100k down payment from savings). Once we closed with our previous house we put the money toward the new house. After two years of paying a large mortgage payment I decided to recast for $50 on our remaining $70,000 mortgage. I was ready to see my monthly housing costs line item be smaller, even though I knew there was an extra $2300 going toward principal ever month.
Recasting is good if it’s a small fee and you have a handle on your total housing debt. It’s been said here before., Anything above the average housing costs for your geographic area is lifestyle costs, not investing.
This thread made me consider something that a quick Google search didn’t help with. Let’s assume I’m in camp payoffyourmortgageearly. If I’m paying a bit extra toward principle every month, but then a few years down the road I use a windfall to recast, am I correct that my amortization will go back to the original 30 year payoff date? Anyone have any experience with this?
I use a windfall to recast, am I correct that my amortization will go back to the original 30 year payoff date? Anyone have any experience with this?Click to expand…No experience to the later question. Yes is the answer to the first question. A recast does not change the terms of the loan agreement (rate, length of loan). A recast only changes the monthly P&I of the loan based upon the lump sum principle prepayment made as part of recasting of the loan. When recasting is done, it is based upon the remaining principle amount of the loan so prior smaller principle reduction would impact the overall monthly P&I amount when a loan is recast (lowering the amount of monthly P&I).
Because no loan terms are changed, recasting is of limited benefit imo.
This thread made me consider something that a quick Google search didn’t help with. Let’s assume I’m in camp payoffyourmortgageearly. If I’m paying a bit extra toward principle every month, but then a few years down the road I use a windfall to recast, am I correct that my amortization will go back to the original 30 year payoff date? Anyone have any experience with this?
Click to expand…When the recasting is done, the new amortization schedule uses the original payoff date and then reamortizes the remaining principal balance over the remaining term.
Example: I take out a 500k mortgage with 30 years amortization with a monthly principal and interest payment of $2,533. If I am 2 years into the mortgage and I receive an inheritance which I use as a lump sum to pay down the remaining principal balance to 200k, then I pay the fee for recasting, the bank will create a new amortization schedule with the 200k principal balance to be paid off over the remaining 28 years of the original term. Now my monthly payment goes down to $1,048.
So I am saving on interest costs, and I have better monthly cash flow as well. If, on the other hand, I simply pay down my balance and do not recast the mortgage, I save on interest but my monthly cash flow does not get better until some time in the future when the loan balance is fully paid off. One of the negatives of prepaying a mortgage is there is no improvement in monthly cash flow despite the savings on interest costs. That is referred to as a loss of liquidity. That loss of liquidity is a potential issue if you do not recast the loan.
This thread made me consider something that a quick Google search didn’t help with. Let’s assume I’m in camp payoffyourmortgageearly. If I’m paying a bit extra toward principle every month, but then a few years down the road I use a windfall to recast, am I correct that my amortization will go back to the original 30 year payoff date? Anyone have any experience with this?
Click to expand…When the recasting is done, the new amortization schedule uses the original payoff date and then reamortizes the remaining principal balance over the remaining term.
Example: I take out a 500k mortgage with 30 years amortization with a monthly principal and interest payment of $2,533. If I am 2 years into the mortgage and I receive an inheritance which I use as a lump sum to pay down the remaining principal balance to 200k, then I pay the fee for recasting, the bank will create a new amortization schedule with the 200k principal balance to be paid off over the remaining 28 years of the original term. Now my monthly payment goes down to $1,048.
So I am saving on interest costs, and I have better monthly cash flow as well. If, on the other hand, I simply pay down my balance and do not recast the mortgage, I save on interest but my monthly cash flow does not get better until some time in the future when the loan balance is fully paid off. One of the negatives of prepaying a mortgage is there is no improvement in monthly cash flow despite the savings on interest costs. That is referred to as a loss of liquidity. That loss of liquidity is a potential issue if you do not recast the loan.
Click to expand…In this example if you recast you will pay a lower amount over the next 28 years rather then getting it paid off on the higher payments over 78 years. I guess it depends what you want. A little more cash flow right now or more cash flow in several years.
However if you stretch it out over the full term you will pay more interest in the end with recasting. Not nearly as much as the original loan but more then if you keep the high payments.
“Never let your sense of morals prevent you from doing what is right.”
In my case, it was useful. After researching extensively, I concluded it would only work if:
1) Lump sum is large enough to make a meaningful difference
2) no to low fee
3) All taxfree and taxdeferred investment options are maxed out
4) Mortgage interest is relatively low – so that refinancing does not make sense
5) Risk aversion is low – so that it can take the place of bonds/similar investment in your portfolio and you can stand the loss of liquidity
6) you are disciplined to not squander away the improved cash flow
I had a 30year $1M @ 3.63% mortgage. Made two payments in consecutive years of $165k and S110k and saw monthly payments drop from $7100 to $5600. It is just another investment option with its own characteristics – no liquidity and ~3% yearly return guaranteed. It has its place for the early payoff folks. In the end, if you can comply with #5 and #6 above, chances are you are doing things right anyway.