Last month (October):
Years left: 7.41666667
P = $821.47, I =$392.94, Escrow = 621.66
This month (November):
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?
November 5, 2012 at 7:09 am
I haven’t recast in this way, but I’m going to look into it. I have a 30 yr mortgage with my lender at a rate that is no longer competitive. I tried going the re-finance route last December but the appraiser brought back terrible comparables so my home value was assessed at less than 20% equity. (!!) Needless to say, I did not refinance when given the choice of either paying PMO or having to come up with a big chunk of money to reach what they calculated as my 20% equity point.
I’ve been pre-paying enough to get the mortgage paid off in 20 yrs. I don’t really want to have a 30 yr mortgage, but if I ask my lender about recasting instead of going the standard refinance route of working with a mortgage broker, etc. I guess I’m stuck with the 30 yr term. Is that correct? Is that how recasting works: no change of terms, just rates?
November 5, 2012 at 7:12 am
No change of rates, it just lengthens the payment back to the original time-frame. It isn’t a good way to save money, just to lower your monthly payment.
November 5, 2012 at 2:36 pm
Ah, then I definitely don’t want to re-cast. I really want to refinance and get one of those tasty low rates so many people are talking about. At 4.875% my rate is quite high considering my stellar credit.
November 5, 2012 at 8:53 am
Woohoo for being under 100K! I think I might have said that when you went under 100K and was super surprised that you didn’t really notice :P
Alas for eating indeed!
I think that you guys would use recasting to your benefit, but many people would use it to lower their monthly payment and then spend tons more money…er, I guess that’s what you guys would plan on doing too. Just like the people who refinance from a 30 year mortgage into a new 30 year mortgage.
I’m actually considering refinancing to PenFed’s 5/5 ARM if it is still at 2.75% when I have 30% in equity in a few months. With no closing costs, shaving 0.25% off the rate isn’t bad. With my payoff schedule, I don’t think that anything better than a no-fee refinance would come out ahead.
November 5, 2012 at 9:58 am
November 5, 2012 at 10:10 am
Never heard of recasting before. That’s a very useful tool to have available for people in your (prepaid) situation. :-) No wonder you weren’t worried about having tons of cash on hand.
November 6, 2012 at 9:01 am
It is neat that you can unlock that prepayment for cash flow without refinancing or locking into a higher HELOC rate. Makes prepaying seem less potentially dangerous, even if you can’t get the whole thing paid off.
November 5, 2012 at 11:32 am
So is it possible to do this with student loans? I’ve noticed that prepaying seems to extend my “due date” for next payment (though the electronic debit goes forward either way), which I’ve been thinking of as an automatically recasting, sort of (i.e. if I had to stop making payments entirely for a time, I could). It seems like student loans would follow mortgage logic, not credit card logic, since the debt amount isn’t changing give regular payments.
November 5, 2012 at 11:40 am
That’s not the same as recasting. If you’re intending to prepay your student loans, you should tell them to apply your pre-payments to the principal. The way that they’re allocating your pre-payments you’re paying more interest and might as well not be prepaying at all (and instead putting that money in a savings account or something).
I’m not sure if you can recast a student loan– it may vary by lender. I do know that they are generally flexible about working out repayment plans when you have a negative income shock. It’s a good question.
November 5, 2012 at 12:19 pm
I tried refinancing to lower the rate and recasting. Both would have lowered my payment. However, the mortgage company would not allow me to since I was so close to the end of 30 years. I needed to lower the payment and would have agreed to pay another 30 years…lol. A very low payment would have helped. I could still have prepaid or just paid it off in a lump. I never could understand why they told me what was “best” for me. I knew what was best for me.
November 5, 2012 at 12:45 pm
I had never heard of recasting until last year when I was discussing different options with our mortgage guy. I really wish it was better publicized. Although I guess it’s only appealing to people who prepay their mortgage.
November 5, 2012 at 12:49 pm
Yeah, you have to both repay your mortgage *and* have reason to want extra cash flow.
November 6, 2012 at 5:07 am
I can get on the woot train for a mortgage under 100k! Such a symbolic dip that is really exciting.
I wanted to mention something interesting about mortgages. Another blog I read (frugal babe) is also written by someone who intends to pay her mortgage off early. But she and her husband both work as insurance brokers online, and they’re not sure exactly how the ACA will affect their business. In order to hedge against issues, they’ve been “pre-paying” their mortgage into some sort of other fund (maybe a mutual fund or high yield interest?). She says she knows they’re losing out on some interest savings, but the flexibility is worth it to them. When the fund becomes more than her mortgage, she’ll pay it off in one lump sum.
Somewhat speaking of (and not at all related to your post), I paid off my student loan in full. Woooh! It wasn’t as much of a gut punch as I thought. I’m now slowly building back up my efund. But it is such a relief to know that I won’t owe any interest ever on that loan. We’re under the $10k amount with my husbands loans now too, so we’re looking forward to getting everything paid off in the next year or so and truly having flexibility in our life.
November 7, 2012 at 11:07 am
You lost me at recasting but whatevs– CONGRATS on <100k
November 10, 2012 at 9:42 am
i was able to do this with my federal consolidated student loan. i had paid around 10k extra , then my husband went back to school. money was tight so i recast and my payment was lowered by $70/month. they actually extended the term a full 25 years instead of just stretching it to the original end date (around 22 more years)
November 10, 2012 at 9:56 am
Interesting! Thanks for letting us know.
November 12, 2012 at 7:02 am
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