I read this article the other day. It taught me a new financial term: mortgage recasting. This particular action is taken when you want to reduce your monthly mortgage payment… only. The term stays the same and the interest rate stays the same. Contrast this with a mortgage refinance, when you are changing either the term length or the interest rate in order to get a lower monthly payment. If recasting sounds like a solution in search of a problem, you’re right there with me.
Some people may not have whatever it takes to go through a refinance. Maybe a hit to the credit score for a hard inquiry, the closing costs, the appraisal costs, the additional fees, the potential negative change in interest rate to get a longer term. There’s plenty of reasons. But a recast is simple. It’s a lower fee and doesn’t even involve any other invasive actions. Everything is simplified because all you are doing is lowering your payment.
Here’s the concept of recasting in a nutshell. You make a very large payment on your mortgage, then the bank recalculates your monthly payment on the new principal balance until the end of your loan term. It will be lower.
If you feel confused by this, let me reiterate the example in the article and see how that helps. You have a $200k mortgage balance and your mortgage payments are $1200/mo. You make a $50k payment on your mortgage, then recast it and your monthly payment drops to $900/mo. and you’ll save $35k in interest.
Maybe you’re still with me on this. But, I can’t wrap my head around the idea of lowering your payment when you have surplus funds. As if your thinking is, “I have 50,000 dollars in emergency savings. I should use it all at once to save some money later.” You’re saving $300/mo. $50k is almost 14 years of $300 monthly savings. And if you put all that money into your house, and you need it later, you’re looking at a HELOC or refinance to get it back out, both have a lot of fees to go with them.
I can understand how the concept works, I just can’t see why anyone would want to use it. Why not just throw the $50k as an extra payment and shorten the loan term dramatically? Because you can’t afford the $1200/mo and need it to be $900/mo? You have $50k! Why can’t you afford $1200/mo and still have almost 14 years of the difference on-hand?
Crying poor with a stack of Benjamin’s in each hand.
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