Downsides to a mortgage recast?

Question

Once I've made enough payments toward the principal, the bank allows me to recast my mortgage. Say originally, I have to pay $2000 per month and this will allow me to pay off my loan earlier, at Nov. 2038. After the recast, I may only have to pay $1500 but I will pay off May 2045; however, if I continue making the $2000 per month (extra $500 toward the principal) I will still pay off the loan Nov. 2038.

Is there any downsides to the recast? Why wouldn't anyone do it as soon as they are able (made enough principal payments)? It doesn't involve a credit pull, as I understand.

I'm in the U.S., if it makes a difference.

Answer 1

There are some comments that request clarification on specific terms of your 'recast', but it seems to me you are asking this question hypothetically for how you should plan in the future. The simple answer as to whether someone would extend the term of their mortgage is based on whether they want to commit to being debt free sooner, or leave flexibility to have more cash in their pocket for the meantime.

You could get a 20 year mortgage, and intend to pay it in 10 years, or you could just get a 10 year mortgage. The first way gives you flexibility to avoid double payments if you need the cash, the 2nd way forces you to focus on financial goals.

Whether you choose to 'recast' the mortgage in the future to extend the term is effectively the same decision as to how long your mortgage term is when you buy the home in the first place.

Either way, you aren't "beating" the bank - they are happy with whatever you choose, and you can be certain that they have priced each option in a way that makes sure they profit off of you. However, you should be aware that many people get trapped by high debt, because they are not properly informed and/or motivated to pay it off. For that reason, many financial experts advise consumers to take as little debt as possible, and pay it off as fast as possible. Some go as far as to suggest avoiding a mortgage and only buying your home if you can afford it in cash. This is not feasible for many people, but by the same token, many people could 'afford' a higher monthly mortgage payment by limiting some amount of spending excess, and choose not to.

So yes, recasting the mortgage to 'give yourself breathing room' (but internally committing to the same payment plan) is possible, but without financial discipline, those 'optional payments' might become 'non-existent payments'.

Answer 2

This offer seems like a no-brainer to me. In the comments you've confirmed there is no cost, and the terms are the same. Rates are still historically low, so extending the amount of time to keep the low rate, for free, doesn't have a downside for a financially responsible person. I would take the offer.

From there, the options are plentiful, for example:

1. The obvious default is to change nothing and continue making your current payment. You don't need to necessarily make any changes now, or ever. But it's nice to have the option in the future to pay less if you want to, especially if your income decreases or your expenses drastically increase for some reason and you deplete your emergency fund.
2. If you have any other debt with a higher interest rate than your mortgage, then no-brainer #2 is to pay the minimum on the mortgage and start paying down your other debt(s) with the leftover.
3. Consider reducing your payment and investing the difference. You could start now, or in 5 or 15 years if you wish. Note if you aren't currently maxing out a tax advantaged account, perhaps the extra cash may enable you to contribute more to a Roth IRA or 401K.

Side Note: There are still quite a lot of no-cost refis happening now. I'd double check that the rate you're recasting is still competitive.

Answer 3

This depends on the lender, but recasts are usually (always?) not free. So the obvious downside is the fee you pay each time you recast.

Answer 4

That's a bit of an oddball. Typically "recast" means that you put it a lump sum payment and use that to lower you monthly payments at the same terms (same interest rate, some remaining run time).

What you are you being offered sounds like a hybrid between a refinance and a recast.

Is there any downsides to the recast?

That depends on the specific terms, conditions and cost. Chances are the bank wouldn't be offering it, if it weren't a better deal for them than it is to you. A typical recast cost is maybe $5000 which will be added to your principal. However, the bank will rarely state it like this and may talk about it as "a few dollars a month".

It's also possible that your interest rate is substantially higher than the current rates. They might offer you a "free" recast, to prevent you from refinancing, which would be a better deal for you.

I will still pay off the loan Nov. 2038.

Probably not. Chances are you have to pay a few months more to cover the cost of the recast.

Things to consider:

1. If current interest rates are lower than your loan's interest rate, you may be better off with a refinance
2. If you think it's highly likely you'll need a lower mortgage payment in the future, you need to do a careful cost/benefit analysis of the recast offered. That requires wading through terms and conditions.
3. If you have extra cash lying around, you can just make a lump sum payment WITHOUT a recast. That significantly shortens the loan and the total interest paid, but doesn't cost anything (for most normal mortgages).

Answer 5

If all you want to do is re-amortize (after significant principal curtailments for example), convert from ARM to fixed, or extend the term--you're not going for a lower rate, adding/removing borrowers, or changing lenders--then a recast is a cheaper route than doing a refinance. The recast will likely require some kind of loan modification agreement to modify the terms of the promissory note, but otherwise there's not much to it, so the lender can keep fees low.

If you have no reason to re-amortize, convert from ARM to fixed, or extend the term, or if you are also looking to refi into a lower interest rate, then a recast is not the way to go.

Say originally, I have to pay $2000 per month and this will allow me to pay off my loan earlier, at Nov. 2038. After the recast, I may only have to pay $1500 but I will pay off May 2045; however, if I continue making the $2000 per month (extra $500 toward the principal) I will still pay off the loan Nov. 2038. Is there any downsides to the recast?

The downside of taking up this offer to extend the term (and lower the payment) is that you're paying for the option to take longer to repay your debt, but if the existing payment is not burdensome, what are the chances that you'll ever really make use of the lower payment? Do you have some investment in mind for that extra $500 a month that you expect will have enough return to compensate for the extra interest (and likely small one-time recast fee)? Even if you recast only to keep making larger payments then you're paying the recast fee for an option you never used.

If on the other hand you think there may be a chance you need to have lower payments, and a refinance wouldn't lower your rate significantly, then a nominal recast fee might be justified by the real option value of having that lower minimum payment. Similarly, if you have something in mind for that $500 a month--investing in something else say--and a refi would not lower your rate, then that recast could be nice. For instance, if your Debt-to-Income ratio was coming back just a little too high for a loan to purchase an investment property, that $500 per month reduction might be enough to get you to qualify.

Answer 6

I have read the 15 vs 30 year term mortgage debate for decades. And listened to all the arguments against getting the 30 and investing the difference. I went with the 30. At the 15 year mark (2012) I owed $265K, but had nearly $359K invested. Not quite $100K delta and to many, not worth the risk. But, since then, the S&P, with dividends reinvested, is up close to 300%. Yes, I am glad I didn’t listen to the anti-debt crowd. (Keep in mind, also, that 15 year period ending in '12 contained 2 crashes and the worst decade in a century. Even then, the years since have more than made up for it.

Let’s look at the risk I took on. In the 100 15 yr periods from 1900-2015, the lowest 3 were below 4%. But barely. Had that been the case, I’d have been a bit behind in year 15, but the years since would have made up for it. And still produced a substantially positive result.

To answer your question - that one would take the money saved and not use it wisely. The anti-debt crowd makes one flawed assumption. That the average person isn’t responsible. The fact that some 50% of people carry a balance on their credit card leads them to give universal advice for everyone which is suitable just to those 50%.

If the interest rate were, say, north of 6%, the time for success becomes longer and the risk a bit higher. But with fixed mortgage rates so low, literally zero after taxes and inflation, methodically investing will give a positive result.

To be clear, if those anti-debt peeps sleep better at night for how they’ve arranged their affairs, then they are doing the right thing. When asked what ones stock/bond mix should be, I say stocks should not be so high a percent that you lose sleep. That means a different number for each of us.