Ever thought about recasting your mortgage instead of refinancing it? I hadn’t, even though I’ve refinanced several mortgages on various properties since 2005. I’m all about snagging the lowest mortgage rate I can. But recasting a mortgage might be a smart move if you suddenly come into a chunk of cash and want to lower your monthly mortgage payment without the hassle of refinancing.
So, what’s a mortgage recast? It’s a feature in some mortgages where the remaining payments are recalculated based on a new amortization schedule. You pay an extra lump sum toward your principal, and your mortgage is then recalculated based on the new balance.
Let’s say you’re 5 years into a 30-year mortgage at 4%. Your loan size is $500,000 and your property is worth $700,000. Your monthly payment is $2,387. You’re happy with your lender and your 4% mortgage rate, and you don’t want to go through the hassle of refinancing a loan and paying excessive fees. Plus, you just inherited $200,000 from your late aunt.
If you use the $200,000 to pay down principal from $500,000 to $300,000, your monthly mortgage payment will stay the same at $2,387. The only thing that will change is the percentage of payment going towards principal (more) and interest (less). If your goal is to increase monthly cash flow, paying down principal, without refinancing or recasting, won’t help you.
But if your lender allows you to recast your mortgage, you can use the $200,000 to pay down principal, and have the remaining $300,000 amortize on a new 25-year amortizing schedule. If so, your new monthly payment would decline by $803 to $1,584.
To recast your loan, your lender usually requires you to pay down a lump sum towards principal. Paying down 5% or more is common. There is also usually a small fee to recast (<$300 or free). Further, not all mortgages have the option to recast.
Loan recasts are allowed on conventional, conforming Fannie Mae and Freddie Mac loans, but not on FHA mortgage loans or VA loans. FHA and VA loans already give borrowers a lot of benefits such as a lower downpayment and subsidized lower interest rates.
Some lenders recast jumbo loans, negative amortization loans, and option ARMS, but consider them on a case-by-case basis. You’re just going to have to ask your lender whether your loan is eligible. Further, before refinancing your loan, you should ask as well.
Finally, to qualify for a loan recast, you must be current on your loan payments and have the cash necessary to pay down your principal balance.
There are several advantages to mortgage recasting. They include reduced payment, no appraisal required, no credit check needed, prevents you from slacking off, and improves a transition finance problem.
However, there are also disadvantages to mortgage recasting. It requires a lot of cash, doesn’t reduce mortgage term, and your interest rate stays the same.
The ideal candidate for recasting a mortgage needs to reduce monthly expenses, does not have any better investment ideas for his or her cash, does not want to go through the pain of refinancing a mortgage, does not have a high enough credit score to refinance to a better rate, does not want to pay expensive refinance fees, does not qualify for a “no-cost refinance,” has a mortgage on the smaller side (<$300,000), which makes refinancing cost-ineffective due to the fees, is a more conservative investor who prefers to simplify life, and really likes his or her existing mortgage rate or can’t qualify for a better one.
If I could go back in time, I still wouldn’t recast any of my mortgages because I’m all about trying to lower my mortgage rate to save money. It would make no sense for me to recast my previous mortgage at 4.5% given I could refinance at 2.625%. To ensure that I don’t spend 30 years paying off the mortgage, I plan on paying down about $80,000 in principal each year so that I have a zero balance by October 1, 2026.
In my opinion, refinancing to a lower rate if the fees allow you to breakeven within 24 months is better than recasting. I’ve always either refinanced when my breakeven was under 12 months or my refinance was a no-cost refinance.
I also think recasting a mortgage is better than doing nothing because you’re paying down debt and reducing your monthly expenses.
Finally, getting a fixed-rate mortgage amortized over 30 years is better than renting for 30 years. In 30 years, your $2,000 a month rent payment will increase to $4,854 assuming a 3% annual growth rate. Meanwhile, your $2,000 mortgage payment will stay fixed and eventually go to $0. As an added bonus, you will then have an asset to rent out or sell if you wish.
Recasting a mortgage isn’t for everyone, but it could be for you. Always do the math before making a decision. Look at all your options and feel blessed that you have some.
Investing in real estate is my favorite way to achieve financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile.
The combination of rising rents and rising real estate prices builds tremendous wealth over the long term. Meanwhile, there are more ways to invest in areas of the country where valuations are lower and net rental yields are higher thanks to crowdfunding.
Take a look at my two favorite real estate crowdfunding platforms. Fundrise is a way for accredited and non-accredited investors to diversify into real estate through private real estate funds. Fundrise has been around since 2012 and manages over $3.5 billion for over 500,000 investors. It predominantly invests in residential and industrial properties in the Sunbelt, where valuations are lower and yields are higher. It’s my favorite private real estate platform where the investment minimum is only $10.
CrowdStreet is a way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
I’ve personally invested $954,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
Both platforms are sponsors of Financial Samurai and Financial Samurai has invested more than $250,000 in Fundrise funds.
