November Mortgage Update: under 100K and playing with amortization

Last month (October):

Balance: $90,282.60
Years left: 7.41666667
P = $821.47, I =$392.94, Escrow = 621.66

This month (November):

Balance: $88,761.62
Years left: 7.25
P = $857.03, I =$357.37, Escrow = 621.66

One month savings:  $2.62

First up, can I get a woohoo for being under 100K?  (Yes, I know I should have asked for it two months ago, but I had other things on my mind.)  If I had no other expenses at all (including taxes), I could totes pay this off in a year with just earned income, and have a bit leftover.  Alas for eating, utilities, childcare, etc.  Can’t quite pay it off with our secondary stock market emergency fund either, mores the shame.  Though our primary savings emergency fund plus the secondary stock emergency fund could do it… again, assuming no taxes.

With my current mad grant getting, it looks like we won’t have to re-cast (or re-amortize) the mortgage right away, and if we keep up with income generation we may never have to.  One can hope!

However, recasting is still a neat thing and I’d like to talk about it.  One of the things people say in the prepay the mortgage debate is that having a paid off mortgage is great, but there’s no way to recoup that money in a true emergency (one so bad that your HELOC is cut off) if you’ve prepaid too much.  Thus, they argue, you could lose your almost paid off home for want of being able to make monthly payments if you didn’t keep enough cash reserve.  However, that’s not true– you can regain some flexibility from pre-payment through recasting, a means of lowering your monthly payment at minimal expense.

What is recasting?

To understand recasting, you first have to realize that mortgage loans are different than, say, credit card debt.  With credit card debt, the minimum payment you have to make varies every month based on your balances.  As your balance goes down, you have to pay less each month down to a certain floor, if it goes up, you have to pay more.  Lower required monthly payments can help if there’s a financial emergency in the future.  With a mortgage, they assume you’re not going to be adding any more debt, then they take the interest rate and the number of years you said you’d be paying, and they figure out how much that works out to in order for you to pay the exact same payment each month.  With a credit card, you pay less next month when you pay extra this month.  With a mortgage, you pay the same amount next month, but you pay for fewer months total when you pay extra this month.  So if your home is a long way from being paid off, you may wish you had kept that money in order to keep making your regular payments in the event of an emergency.

What recasting does is it takes that amount you’ve prepaid into account, and it looks at how much time you have left in your loan as you had originally set it (so if you’re 8 years into a 30 year loan, it will take the remaining 22), and it recalculates how much you would have to pay each month in order to pay the same amount in the time you would have left had you not done any prepayment (so 22 years).  Unlike refinancing, your interest rate does not change.  However, if you prepaid, your monthly payment will go down and the term of your loan will increase back to what it would have been prior to repayment.

Credit cards essentially redo this calculation every month (though it’s a little more complicated because they don’t really have a set term).  Your mortgage won’t unless you ask, and generally you will have to pay a fee.  Looking on the internet, it looks like recasting fees vary from $0 to $250.  That’s a lot less than the thousands it may cost you to refinance.

So what does that mean for me?  Let’s say we decide to recast next September.  At that point we’ll have paid ~86K extra since our last refinance.  We refinanced for a 20 year term and will be 36 months (or 3 years) into it, with 204 months left.  Our current mortgage payment not including escrow is $1214.40.  If we reamortize, our new payment not including escrow will be $523.78.  That’s less than half what we were paying before.  But, of course, instead of having 5.83333 years left on the loan at that point, there will be 17 years left on the loan.  It stretches the payment back out.

Reamortizing (or recasting) is a great idea if you need temporary cash flow and have been prepaying your mortgage.  It cuts down your required payment and allows you to get over whatever hopefully temporary negative shock you’ve had so you can get back to prepayment without having to default on any of your obligations.

Have you ever recast your mortgage?