Monday, February 24, 2014

Money Monday: Don't Refinance, Recast your mortgage instead.


A year and a half ago, my husband and I purchased our first home. For us, home ownership has been a dream. We rented for 5 years, and in each place we rented, we constantly dreamed about what we would do with the house or apartment if we owned it. We love working in the yard, doing routine maintenance, and doing projects around the house. For us, our home will never be "finished," it will always be a work in progress. 

One area that in which we are very driven is to pay off our home as quickly as possible.  We talk about what life will look like or be like when we don't have a mortgage payment. For us, that means freedom. It means not being tied down to a job we hate just because we have bills to pay. It means options. It means the ability to give to others in a really big and dramatic way. 

We are always looking for ways to squeeze out a few more dollars from our budget to put towards an extra payment to the mortgage. While we have a 30 year fixed loan, we are hoping to have it paid off in the next 7-10 years.

Fortunately for us, we purchased our home at the bottom of the market, and we were able to get a 4.00% fixed rate. This is a very low rate, and we are happy to have it, but I called a few mortgage companies to get some information about doing a refinance to reduce our interest rate a bit. After talking with several companies, we came to find out that because of our aggressive repayment schedule, the refi would not make sense for us. 

One company, introduced me to the idea of a Mortgage Recast, or re-amortization. First, the homeowner must check with their lender to see if you qualify. Most banks charge a $250.00 fee to recast a mortgage, which, compared to a refi is nothing. 

Next, the homeowner then brings a substantial  amount to the table (basically a 2nd down payment, the average is at least 10% of the remaining balance). Those funds are applied to the unpaid principal, and then, the monthly payment is reduced. The loan term remains the same, but it because you made a large down payment, you will pay less in interest and you will be able to reduce your monthly payment. 

This option is great for homeowners who have a cash reserve and are looking to free up some cash flow in their budget for the future, or for homeowners who don't qualify for a refi, like us. 

While this is not something we have done yet, we have looking into it quite a bit, and we are both intrigued by the idea. First, it would be great to reduce the principal substantially, and second, if we were able to free up some funds currently allocated to our monthly mortgage payment, it would allow us to work towards some other goals we have in mind as well. 

The home we are living in now is not likely going to be our "forever home." But, we know the more we pay off, the less we pay in interest to the bank, and when we sell, we should be able to recoup all those funds. 

Anyone out there ever done a recast? Would love to hear your feedback. 

8 comments:

ND Chic said...

I've never heard of this and I'm in this industry. Who is your mortgage lender? Do they allow it?

Refinancing would only make sense for you if you went to an ARM to get a very low interest rate but I wouldn't be comfortable doing that.

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Denise said...

we are stuck - meaning our home value has not increased AT ALL thankfully we have a low interest rate like you...I would love to refi to a 12-15 year mortgage but not in our cards for now.

Brooke said...

never heard of a recast.
currently i wanna be done with our mortgage in 5 years, but that would put a hamper on investing Jay has in mind.

Kevin Fritz said...

When lenders recast your mortgage, they calculate a new amortization schedule based on your new loan balance. You’ll end up with a new amount for your monthly payment, making it easier for you to pay your debts. However, you have to make a great deal with your mortgage company regarding this. Lenders are able to, but not required to, recast mortgages when you pay extra. Find out if it’s possible and how much it will cost. :)

Kevin Fritz

Barry Sutton said...

When it comes to purchasing a house and mortgage, there are really a lot of options that could fit the owner’s needs. It’s a wise move that you asked different companies for details. From this, you understood each option and eventually helped you to pick the best one for your house.

Barry Sutton @ Iron Point Mortgage

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