Is It Time To Recast Your Mortgage?

If you have already refied your mortgage, or are unable to because of new tighter loan restrictions, there’s an additional and little-known step you can take to lower your monthly payments. It’s called “recasting” or “re-amortizing.”

You pay a small fee and then apply a chunk of cash against the remaining principal so that the term remains the same but the monthly payments decrease. WSJ writes:

For example a person with a 30-year $300,000 fixed-rate mortgage and an interest rate of 4.75% who recasted one year into the loan by putting in $60,000 toward the principal would trim his balance to $235,371. Assuming there were 29 years left on the loan, that would result in a monthly payment of $1,247 instead of the original $1,565.

Whether or not it makes sense depends on your individual situation. It may be better to put that same money in a higher-yielding investment and wait until you have enough to pay off your loan in full in one swoop. (Assuming there is no or little pre-payment penalty.)

Not all loans can be recast, so check with your lender.

A New Way to Cut a Mortgage [WSJ]

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  1. PunditGuy says:

    Holy crap. If I had a spare $60K sitting around, I wouldn’t need to worry about paying $300 less per month on my mortgage.

    • Mr. Stupid says:

      Or, if you’ve been adding extra $$ to your mortgage payment for a few years, you might have paid it down by an extra $60K. It doesn’t have to be done in a lump sum.

      • PunditGuy says:

        A few years? Let’s call it 5. That’s 60 months. To have paid down a mortgage by $60K in 60 months… let me do the math real quick… that’s and extra $1K per month on, in the WSJ example, a $1500-per-month mortgage. I’m not in the habit of overpaying my mortgage by two thirds — are you?

        Fail, as the kids say these days.

        • Necoras says:

          I was paying an extra $400ish a month on my mortgage before I refinanced. When we refinanced it was from a 30 year to a 15 year, which kept the payments pretty close to what we had been paying. Even now I round up to an even increment of $100. If you go by our original mortgage we pay about $500 a month more. Now it’s closer to $75.

          It’s not $1000, but some people do make large extra payments every month. We just codified ours and got a much lower interest rate to boot.

        • Rachacha says:

          Buying within your means also helps. When we purchased our first home, we purchased based on the money that we were making and saving that day, even though the bank said we could purchase a much more expensive home. Over the years we received raises and promotions which increased our available money, so we made extra payments on the house. $100 today can shave several hundred or more in interest 20+ years from now. The net result was we started off with a 30 year loan, refinanced and made some extra payments, and in the end, payed off our home in about 10 years.

        • redhouse387 says:

          Pundit-
          Why do people like you scream FAIL and try to insult people just because what they suggest doesn’t fit your situation. Lighten up a little and relax.
          BTW, I’m in the habit of paying two-thirds extra each month. I guess I am a failure.

    • spamtasticus says:

      There is another fact to consider in this equation (decision). Inflation. Every time the fed floods the money supply it causes every single dollar to loose buying power and therefore become less valuable. The more money you have in your bank account the more you loose. Conversely, the money you owe becomes “cheaper” because it is in fact your creditor that is loosing value for their “investment” in your. Technically, In reality in fact, if your interest payment is lower than the rate of inflation you are actually gaining value by not paying the loan. If this is too much for you to grasp just think of the fact that a corvette back in the 70s use to cost about $5,000. This is not because they where cheaper but because the dollar had more worth. If we end up with Hyper Inflation then things will get even more interesting. When Brazil hit hyper inflation day laborers where paid 2 times a day. Once in the morning and once again in the afternoon. This was due to the fact that their pay actually was worth less in the afternoon than it was in the morning. The child of the family would pick up the morning pay from dad and run immediately to the market to buy food for the house before the price went up in the afternoon. The afternoon payment was used to buy dinner. The next morning the laborer’s salary would have to go up in order for them to be able to afford the same food they bought the day before.

  2. CBenji says:

    Well I will just take that 60K I have sitting around under my mattress…

  3. Loias supports harsher punishments against corporations says:

    Another edition of Consumerist’s Tips for the Rich and Bored!

  4. Blueskylaw says:

    People who have $60,000 laying/lying (correct me people) around would probably be better off putting that money into stocks with depressed prices and high dividends, they most likely are not worried about reducing their monthly mortgage payment.

  5. Nighthawke says:

    Taking into account 11/16 report on the robosigning scandal, I would not even touch mortgages for a long time..

    This may have the potential of going from scandal to a full-blown disaster for everyone involved.

    BoFA has ALOT of explaining to do now….

  6. TuxthePenguin says:

    Okay, lets do some quick calculations. Doing a recast at the beginning of period 13 (ie, 12 full payments) would reduce the note from $1,564.94 to $1,247.05. Not including ANY time-value of money, the total interest paid under the old plan FROM THAT POINT FORWARD would be $249,229.04. The total interest paid on the recast would be $198,602.02.

    That’s a difference of $50,627.02. You paid in $60k and got back, over the course of 29 years, $50k. And this is something that Consumerist posts as a good thing?

    If you would have just tossed that 60k at the principal and kept the payment the same, you would have paid off the note at the end of period 241/242 – ten years early. You would have paid a total of $123,018.58 in interest – a savings of $126k.

    So its FAR better to just toss the “inheritance” at the principal rather than bringing down the payment.

    And this doesn’t even include the tax treatment of mortgage interest…

    • wrjohnston91283 says:

      You forgot the sum of the $318 per month saved over the remaining 29 years, which is $110,664

    • not-gonna-tell-ya says:

      slight math fail…. While you are right that you would end up saving only 50k in interest payments, you must also take into account the 300 per month savings. Adding that over 30 years is approximately 108,000 dollars. Added to the 50k in interest savings and it comes out ahead.

    • not-gonna-tell-ya says:

      I forgot to add that I agree with you that I would prefer a payment to principal and keep the same monthly payments so that you aren’t paying mortgage for 30 damn years….

      • qwickone says:

        I totally agree, but for a different reason. I’d rather have that $60K liquid in case of emergency (big emergency, obviously, and I’m inherently paranoid). No matter what’s going on, I like to have a min of $30K liquid at all times. I realize that’s not a position everyone is in, but generally speaking, I think people are better off to stay liquid and put extra towards their monthly payment, which is something they can stop at any time if they need to.

        • Loias supports harsher punishments against corporations says:

          I think if I managed to get a 30k safety net (which is close to what I want, too) I think I might actually get rid of this ulcer!

      • Loias supports harsher punishments against corporations says:

        You could still do that. You’re lowering your monthly payment through this process, but you still have the option of paying the same payment amount you were originally, thus cutting the length of your mortgage.

  7. andyg8180 says:

    WARNING: not all banks will trim down your monthly payment if you plop down a balooned payment. You should put a warning on the article to have people check their bank rules on big payments.

    my bank will accept big chunks, but i still have to pay monthly and pay the same amount.

    • wrjohnston91283 says:

      The article mentions you need to have the bank recast or reamortize the loan. They don’t just say “write a big check and everything will change”.

  8. Platypi {Redacted} says:

    What is this “higher-yielding” investment you speak of? I would be interested in such a thing!

    • williamv1982 says:

      It will be tough to find anything reasonably safe that is going to beat your mortgage rate at the moment, but you have to remember that rates change. If you recast your mortgage you are locking in your return at your mortgage rate for a very long time. I would rather keep my money liquid and earn less now for the opportunity to reinvest it in the future when things are more interesting. If you recast you paying down a very low interest rate loan, in the future if you want that cash back you are almost certainly going to be paying more to borrow it.

      • Platypi {Redacted} says:

        That is great answer to a dopey question! I was just being a goof, but that is a good response (and kind of mirrors what I am currently doing)!

  9. dolemite says:

    Who ARE these people with 60,000 just laying around? “Honey, have you heard of recasting? We should do it for our mortgage, to lower the payment $300 a month!” “Sure honey…pull it out of one of the savings accounts and have fun”. It’s like the people that pay down 80k in debt by paying an extra $3,000 a month.

  10. williamv1982 says:

    This is an absolutely terrible strategy. You get to pay the bank for the privilege of locking up cash in a long term illiquid asset with a crappy yield? That’s essentially what you are doing with a recast, you are investing money at your mortgage rate in an instrument as long as your mortgage. The best part is if you ever need liquidity you get to pay another couple points to take it back out and it will very likely be at a much higher interest rate when you do!

    A much better strategy would be to stick the cash into anything reasonable safe, take the interest income (admittedly small at the moment) and offset that against your monthly payment. Sure that’s not saving you as much in month 1 as a recast would but 3 years from now when rates look more normal your recast cash is earning more than your 4.25% mortgage rate and you’ll soon outdo the recast strategy.

    With rates so absurdly low at the moment I want to borrow as much as I can for as long as I can provided the payments aren’t burdensome. Paying back borrowed cash is extremely costly both in liquidity and opportunity cost.

    On an interesting side note a friend of mine prepaid a large chunk of his mortgage a couple years ago (something like 75% of a jumbo loan) and they recast his payment for free. When I checked my mortgage docs there is language that gives the lender the option to recast my payments when a prepayment is made. So you might be able to recast for free if you try a large enough curtailment.

  11. johnrhoward says:

    People with big piles of money laying around aren’t usually the same people that are worried about saving a couple of hunderd dollars a month on their mortgage.

  12. Buckus says:

    Because apparently banks are super-happy to modify mortgages. What? They’re not? And have even been hampering/cock-blocking people who try?

    Thanks Consumerist.

  13. Mknzybsofh says:

    One thing that is mentioned in the article that is not mentioned here is that putting the ‘savings’ back towards the principal can help pay off your loan that much faster. What the actual savings is in interest? (if any) I have no idea and will let others figure it out.

    • williamv1982 says:

      If you are going to put the “savings” back toward the mortgage there is no point to a recast at all. You could just make a larger prepayment and continue making your scheduled payment, all a recast does is buy you the option to pay less. If you aren’t going to use that option there is no point in paying for a recast.

  14. TheWraithL98 says:

    the original article here should really note something. this only makes sense in one specific case – if you have the lump sum of money and you need lower payments. which seems like an extremely unlikely scenario honestly.

    otherwise, you’re actually losing money in the deal. if you just pay the $60,000 toward your principal, then you’d move your payoff date to sooner, which is going to save a lot more interest than paying out interest on the remaining balance spread over the whole term of the loan.

    • Firethorn says:

      which seems like an extremely unlikely scenario honestly.

      Maybe you were laid off from your old job; given a lump sum severance package, found a new job very quickly, but it pays somewhat less?

  15. pinkbunnyslippers says:

    Sorry but if I’ve got $60k laying around, I a) can probably afford the monthly payments as is and b) can find much better ways to invest $60k.

  16. Farleyboy007 says:

    What about Equity Acceleration? I keep getting letters and seeing stuff about this on my mortgage co.’s website. There’s a setup fee and a monthly fee and it advertises that i pay off my house 6 years earlier and save 45k in interest. I pay the same amount in a given month, i just pay 1/2 of it on the 15th, and 1/2 on the 30th (or i think i can pay every 2 weeks… that would make me pay an extra half payment per year i think… not the end of the world.) My question is, what is stopping from just doing this on my own? why do i need to pay for the privilege?

    • Farleyboy007 says:

      oops, it’s 1/2 my mortgage, biweekly, so i actually end up paying 13 payments in a given year instead of 12. unless there are prepayment penalties, i don’t see why i can’t just do that on my own.