quote:

Originally posted by honestlou:
This is the question: "Does recasting a mortgage save interest?"

This is the answer: Absolutely not, in no way, shape or form.

Well...

quote:

Originally posted by honestlou:
The only way to save interest is to... pay additional payments which will pay off the loan sooner, thus lowering the total interest paid

Which is one function of a recast. Since the recast process requires you to pay a large lump sum towards the principal prior to the reamortization, it's effectively the same as making a bunch of smaller principal payments all at once instead of monthly/annually. Thus the recast process necessarily lowers the total interest paid over the life of the loan.


So actually, yes. In general, recasting a mortgage does save interest, thanks to the additional principal payment required.

The thing is, it doesn't save extra interest over merely making the same amount of additional principal payment without formally recasting/reamortizing. Which (simplified title aside) is what the OP really seems to be wondering here.

The better question is if recasting is the best way to save on interest payments. Maybe we are splitting hairs but of course it saves interest because you make a big lump sum payment at the beginning. Some on here think that banks will consider previous payments but nothing I have read indicates that. At all.

To the real question, no this isn’t the best way to save money on interest. There are only a few ways to do that. First pay off the loan today. No more interest payments. Next find a lower rate in your mortgage including refi costs in your calculations. And lastly and least significant in savings (it’s still significant but not as good as first 2 options)(especially since if you find a lower refi you can still pay off early and save a fortune) is to pay off your loan early which can be a recast or can simply be making extra principal payments on your own. There might be other ways I’m not thinking of but these are the big ones.

Once again, unless your bank lets you count prior payments as the lump sum which one poster claims but nobody else or any of my reading indicates, a recast is a poor vehicle. Everyone who is trumpeting them loves that the monthly payment is decreased. Yet to get that decrease you have to come up with a lump sum payment. It’s wildly counter intuitive that if you are having cash flow problems you are sitting on this large lump sum. It also means the more lump sum payment you bring the lower your monthly payment will be. Small lump sum, small decrease.

If you bring a big lump sum then the math shows you generally would be ahead by investing that money and slowly feeding it into your mortgage via extra additional principal payments.

If you don’t believe me run your own numbers and see for yourself. The only way this works and I don’t think it works this way is if your bank miraculously allows you to count extra payments you’ve made over the life of the loan as the lump sum. Maybe in this one guys case his bank did this but I challenge you to find the bank that will do this. Spoiler: you won’t.

Wow, three pages for a simple answer. Since Skins is probably unconscious from beating his head on a wall, I'll give it a go.

If the additional principle has already been paid to the lender, then recasting simply provides the option of making a lower payment based on the new amortization. If you continue to make the accelerated payment like you have been even after recasting, then it will make zero difference to the overall cost of the loan vis à vis your current situation. That being said, you cannot predict the future. What if a family member has a medical condition, and suddenly you don't have the extra cash flow that you used to have? Or there is job loss, your dog bites the neighbor's kid, or other unforeseen events? One thing is true; the bank will not refund your prepaid principle if things go sideways for you sometime in the future.

If the bank will redo your amortization at zero cost, then go ahead and do it. It gives you a future option that you don't have now, without costing you anything.

People like to say "Invest the difference. Don't pay extra on a low-interest loan." They often don't talk about the risk you're assuming in that investment, or how taxes on dividends and gains will lower your gain, etc. One of the more esoteric points is how liquid assets like a stock portfolio can be seized if you have a legal judgement, but your primary residence is often excluded from liquidation to pay a judgement (taxes excepted). There's something inherently satisfying about owning your abode outright.

quote:

Originally posted by RogueJSK:

quote:

Originally posted by honestlou:
This is the question: "Does recasting a mortgage save interest?"

This is the answer: Absolutely not, in no way, shape or form.

Well...

quote:

Originally posted by honestlou:
The only way to save interest is to... pay additional payments which will pay off the loan sooner, thus lowering the total interest paid

Which is one function of a recast. Since the recast process requires you to pay a large lump sum towards the principal prior to the reamortization, it's effectively the same as making a bunch of smaller principal payments all at once instead of monthly/annually. Thus the recast process necessarily lowers the total interest paid over the life of the loan.


So actually, yes. In general, recasting a mortgage does save interest, thanks to the additional principal payment required.

The thing is, it doesn't save extra interest over merely making the same amount of additional principal payment without formally recasting/reamortizing. Which (simplified title aside) is what the OP really seems to be wondering here.

The answer is still a definite “no”. As you said, paying extra principal will save you interest. There is nothing special about the recasting that saves you money. Lower your rate, or pay it down sooner to save interest. And you can clearly pay it down without recasting, so it does nothing for you.

I guess the “no brainer” part I struggle with is that to do the reamortization you have to throw a lump sum at your mortgage. That’s the whole point. Otherwise nothing changes. So you are sitting on a lump sum that you throw at the principal this lowering your payment. If you are worried about bad times then keeping the lump sum and investing it wisely and pulling from it to send extra principal to the payment you end up better off.

This lowers your payment at the cost of sending a lump sum to your banker. So the money works for him not you. And make no doubt, if you want to significantly lower your monthly payment you can’t send a puddly amount. A puddly amount lowers it but not hugely.

All of these arguments for sound like feel good ideas without the math to back them up. I presented math above, is it wrong? If it’s not wrong this is a sketchy financial strategy that bankers love. Your money working for them at a minimal gain to you.

Attack my math, if I’m wrong or way off base I will admit it. This isn’t the no brainer you guys think it is.

quote:

Originally posted by pedropcola:
I guess the “no brainer” part I struggle with is that to do the reamortization you have to throw a lump sum at your mortgage. That’s the whole point. Otherwise nothing changes. So you are sitting on a lump sum that you throw at the principal this lowering your payment. If you are worried about bad times then keeping the lump sum and investing it wisely and pulling from it to send extra principal to the payment you end up better off.

This lowers your payment at the cost of sending a lump sum to your banker. So the money works for him not you. And make no doubt, if you want to significantly lower your monthly payment you can’t send a puddly amount. A puddly amount lowers it but not hugely.

All of these arguments for sound like feel good ideas without the math to back them up. I presented math above, is it wrong? If it’s not wrong this is a sketchy financial strategy that bankers love. Your money working for them at a minimal gain to you.

Attack my math, if I’m wrong or way off base I will admit it. This isn’t the no brainer you guys think it is.

I'm the one that said 'no brainer' for me it was. I was not required to pay a penny extra, 100% free, no lump sum. A simple question of would you like to re-amortize the loan? If yes then your payment is adjusted like it's a new loan at current rate, current term, the payments will be adjusted to keep the same term based on smaller principal. Nothing changes if you continue the higher payments, mortgage is still paid off early. The ONLY benefit is if put in a situation where you'd want to cut costs you can pay less if you want.

For me it was a no brainer. Apparently what I was offered is rare to our members because most insist that an additional lump sum payment is needed above other previous lump sums and overpayments. I promise I didn't pay an extra penny. It is plausible that since the OP did not mention an extra payment, that his situation doesn't involve an extra payment. Maybe he forgot to mention they wanted an extra $50,000 check, but I find that to be pretty unlikely as that would be something that one asking a question such as this would mention as would completely change all factors in the decision.

Attack my reading comprehension and the OPs ability to provide information, if I’m wrong or way off base I will admit it. This is the no brainer you guys think it is, if the information as provided is correct.

The OP is staying the hell away...and maybe smart.

quote:

Originally posted by SIGfourme:
Make sure your retirement is fully funded.

This right here. Are you dumping your max into a 401K? Its $20500 for those under 50 and $27000 for those over 50.

Maxing out the Roth IRA at $6000 if under 50 or $7000 if over 50?

I'd be doing at LEAST that before making those huge payments on the mortgage.

Thank you all for your replies. I hadn't expected so much interesting and educational dialogue. I think the piece I was missing was from Georgeair, that interest is computed on actual outstanding balance. I thought it was precalculated based on anticipated balance.

I am glad to see there was discussion to be had. I've had this rattling around in my head for a while. I will continue to make payments toward principle and get this paid off.

Thank you all for your input