Friday, March 1st, 2019
A ‘recast’ refers to a borrower who makes an additional principal payment and then asks the lender to re-amortize the loan at the existing interest rate. The result is that while the loan term remains the same, monthly payments are reduced. Not all lenders offer mortgage recasts on their loans.
Recasts aren’t well known for a few reasons. Record-low interest rates in recent years made refinancing the go-to approach for borrowers looking to save on monthly payments. Also, lenders make little or no money when recasting—the lenders that allow it usually charge a $250 fee at most.
As interest rates trend higher, more customers are interested in recasts. The Tax Cuts and Jobs Act, enacted in December 2017 will result in over 28 million more taxpayers taking the standard deduction as opposed to itemizing deductions, according to estimates by the Wall Street Journal. That means fewer households are making use of the mortgage-interest deduction to lower their tax bill come April.
Borrowers must call or write their lender to ask if their mortgage is eligible for recasting. The homeowner will usually be asked to sign an agreement, but unlike mortgage refinancing, there’s no credit check and the paperwork and fees are nominal. It usually takes only a month or two for the new payments to take hold.
In some ways, recasting is the flip-side of the better-known strategy of making additional principal payments, which reduces the length of the loan term but keeps monthly payments the same. But the two maneuvers can co-exist: People who either make a single lump payment or have made a number of extra payments over the years—such as borrowers who make bi-weekly rather than monthly mortgage payments—can ask their lenders later on to recast the mortgage.
Making extra or excess mortgage payments will shorten the term of the loan, thus saving a homeowner thousands of dollars in interest. Paying down principal plus recasting also saves on interest over the life of the loan, but not as much as simple prepayment, because the loan term remains the same.
Lenders have various minimum prepayment amounts, which they call “curtailments,” for recasting: some lenders require as much as $20,000, while others have no minimum.
A couple things to consider about mortgage recasting:
• Availability varies. Banks handle recast requests on a case-by-case basis, and not all loans are eligible because of restrictions imposed by various programs or investors.
• Alternative investments. Mortgage holders who currently have low, fixed-rate loans should carefully consider whether other conservative investments—such as high-quality bonds—might result in higher returns that would exceed any savings in monthly payments.
To see if recasting is right for you, try an online calculator. Users input their mortgage balance, current payment and how much additional equity they want to add. The calculator determines the new monthly payment. The calculator then compares how many months or years would be shaved off the mortgage term if the prepayment is made without a recast. Or just call or email me and I’ll run the numbers for you for free!