When it comes to updating your monthly mortgage payments, the first word that pops into everyone’s head is: Refinance.
What if I told you there was another thing you could do with your bank that might offer you more loan flexibility and less cash outlay and takes only a week or two to complete?
Introducing… Mortgage Recasting.
Random quip: When it comes to popularity, refinancing definitely takes the cake. When it comes to total search monthly volume on Google, “mortgage refinance” gets 90,500 searches a month and “mortgage recast” gets 8,100 searches a month. So it’s at least 9 times more popular. Personally, I think lenders should talk about this more but it’s likely not in their best interest since the fees from a refinance are so much higher.
What is a Mortgage Recast?
A mortgage recast (also known as a loan 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 principal balance (aka re-amortizes 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 principal & 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 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 principal 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 current interest rates are at or higher than your current interest rate since 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 4.0% to 3.5%).
Finally, a mortgage recast doesn’t reset the clock on your mortgage terms which is nice for those that were planning to have their mortgage paid off by a certain date.
Differences between Mortgage Recast vs. Mortgage 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 Sum Required||Yes, $5k+ (depending on bank)||Optional|
My Experiences with Recasting my Mortgage
So I had an opportunity to recast my rental property’s mortgage about a year ago. 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 several hundred dollars a month simply 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 $200-300 to do this mortgage recast and within 2 weeks, my next mortgage bill was several hundred dollars less which was great. For refinances, it generally takes 30+ days after your closing before your monthly mortgage is updated.
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 30 to 45 days) and you’re peppered with additional requests throughout the process.
I refinanced my mortgage last year to take advantage of the lower interest rates due to COVID, but apparently I pulled the trigger too soon since mortgage rates are now between 2.5 to 3.0% and I locked in at 3.125%.
When it comes to refinancing, I personally think there isn’t a lot of transparency with the fees associated with it (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 and it’s still pretty confusing to me. The part I’m mostly referencing is that I decided to lock in at an interest rate of 3.125% but the mortgage rates were fluctuating a lot when I decided to lock-in so I was curious to see if I could get an even lower rate. So I asked the bank if I could potentially get a lower interest rate when I saw the “nationwide rates had dropped to sub 3%” headline 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 have been perfectly fine if he had just said “No, that’s not possible.”
At the end of the day, both a mortgage recast and a refinance can greatly help your financial situation but be sure to consider everything. A mortgage refinance definitely takes more time to “break-even” due to higher closing costs but as noted when the rate difference is 0.5% or more on a larger loan balance (greater than $250k), it can really help reduce your monthly mortgage payments.
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.