Another way to decrease your debt: Recast your mortgage

We lowered our mortgage payment by more than $1,000 without refinancing. Here’s how to recast your mortgage

recasting your mortgage

Image courtesy Sujin Jetkasettakorn via FreeDigitalPhotos.net

As I alluded to back in May in Save money with a tool library, there is some potential that we may decide to rent out our house for some period of time. We have a few different ideas in mind, some of which aren’t ready for public eyes. However, since we wisely chose a 10-year mortgage when we last refinanced our house, our payment has been large enough that we’d have negative cashflow at current market rates.

So we had a bit of a conundrum. We didn’t want to restart the clock on our mortgage term, but we wanted that payment to go down. Fortunately there’s an option that perfectly fit our needs and it could fit your needs as well.

Hold up! I suppose it’s time I explain myself. Since I’ve started this blog, I’ve simultaneously mentioned that I don’t have  a mortgage payment and have also said that we’re still working on paying off our mortgage. How can both be true?

The answer is really pretty simple. Being several years older than my wife and because I had a chunk of change from selling some real estate a few years ago, we decided it made sense for me to pay off my half of our mortgage earlier so that I could move toward pretirement (although I still pay my share of the escrow costs). Pretired Mama had quite a bit more saving to go (although she’s far ahead of where I was at her age). But that’s why I had the freedom to quit my job and stay home with the baby (even though I’m still shy of being fully pretired). (I also have two more mortgage payments related to some property I own with my brother, but that’s a story for another day.)

Anyway, here was the situation on our house as 2013 was winding down:

  • Mortgage (1st): $186,000 (10 year loan paid down from $251,000 — all of this is Pretired Mama’s debt)
  • Mortgage (Home Equity Line of Credit): $10,000 (leftover from a deck we recently had built and some other stuff – half of this was my share)

The payment on the first was around $3,000 including escrow. The payment on the second is just $100 (the minimum it can drop to under the terms of this loan.) We could probably rent our house for somewhere around $2,500/month so we’d need to drop it a fair amount to get into positive cashflow territory.

Pretired Mama has been faithfully following my patented template for rapidly paying off a mortgage (seriously — check it out if you’re working on paying off your mortgage. I have yet to see anyone produce a more efficient way to get there quickly.) She had some $40,000 in side savings built up so we had some options. Originally we had planned to do a refinance later this year, but we realized we could get to the same place easily without paying any expensive fees.

Recasting — the easy way to lower a mortgage payment

The method is called “recasting your mortgage” and it may just be the biggest secret in the mortgage industry. A recast of your mortgage simply means the bank will reset the amortization clock based on your current equity situation plus any funds you may wish to bring to the table. The timeframe of the loan remains the same, only the principal drops. She had been paying roughly three years on a 10-year loan so effectively the recast was equivalent to starting a seven-year loan at the new balance.

The bank’s rules (a local credit union) were that you had to be in good standing on the loan and you had to have a minimum of $10,000 to apply toward the recast (either that much equity or cash you brought forward). The processing fee was $150. No appraisal, no credit check, no income check. All we had to do was making a principal payment, call the person in the special products department and tell her the payment had been made, sign and notarize some documents (called “loan modification agreement” — probably the same documents people use when the bank agrees to lower the principal for people who are underwater) and wait. It really was that easy. There was one other question I asked the woman from the bank: “So does our other debt have any impact on this process? For example, if we withdrew some money from our HELOC would that impact our ability to complete the recast?” She said, “No, we don’t look at that at all. You bring the money and we recompute the amortization. That’s it.”

The biggest hassle was trying to get notarized. The bank’s paperwork was unclear about whether we had to have a witness to the notarization or not so we wasted an extra hour with a bored baby at the bank trying to figure that out. (People were scowling at us as we dealt with the signature issue and I’m pretty sure they were assuming we were deadbeats trying to get a loan modification. Heh!)

So here’s how we ended up structuring things. I paid off my half of the existing HELOC ($5,000) as originally planned. Then, we actually pulled some additional funds out of the HELOC to combine with Pretired Mama’s side savings. So effectively, we brought $86,000 to the table from the bank’s perspective (even though half of it was their own money). The remainder on the first mortgage would be $100,000 and the HELOC would now have around $51,000.

When we were done, the loans looked like this:

  • Mortgage (1st): $100,000 (still officially a 10 year loan, but with just seven years left — still all Pretired Mama’s debt)
  • Mortgage (HELOC): $51,000 (this is now all Pretired Mama’s debt as well)

The new payment is $1,800 on the first (including escrow) and it’s still $100 on the second. Monthly savings of more than $1,000/month! So now we’re well below what we could get in rent and Pretired Mama should have the HELOC paid off in a year or less. From there she can either stay on the accelerated plan to pay off the first mortgage or she can shift over to rapidly building up her pretirement fund. Another interesting fact is that the bank said there is no limit to how many times you can recast. So it’s possible we could do one more of these before our loan term is done.

Will your bank allow you to recast your mortgage?

Since I was dreading the high costs and hassle of a refinance, I’m now in love with the recasting concept.

Unfortunately, not every bank is on board with letting you recast your mortgage. My brother and I tried it with another piece of property we own together and they told us they don’t offer this service. And why would they, really? They lose thousands in interest. The only advantage I can see from their perspective is that they retain your business vs. letting you refinance away to another company. But since we use a credit union that offers good service, it’s still an available product (although one they don’t advertise at all).

But if you’re in anything close to my situation, it’s worth a phone call to find out. With a sky-high stock market it can be tough to find a good place to put money. If you’re sitting on cash and are worried about buying at the top of an overpriced market, a recast could be a good solution. You could recast your mortgage, lower your payment significantly then invest the savings on monthly basis, thus dollar-cost-averaging your way into the market — all with less debt hanging over your head.

It made sense for us right now, but every situation is different. Be sure to do your homework. For me, though, I’ll be confirming any bank I take a mortgage from in the future offers a recast. I like having options.

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25 Thoughts on “Another way to decrease your debt: Recast your mortgage

  1. Pingback: How to get rid of your mortgage | Pretired.org

  2. Greetings Nick. I had never heard of such a thing, so thank you for the post. Good to know for the future. I assume the money you paid went to your existing principal (minus $150)?

    That is a better option than when I refinanced last year. Like you, we anticipate renting out the house fairly soon. Therefore, we lowered the monthly payment AND shortened the term. It cost $2k, but the payback period was about 10 months…..so we feel good about that.

    Interesting comments about one spouse and the other having separate debt. I understand not commingling inheritances and the like, but why do you guys differentiate debt? I’m afraid that could be divisive and would cause conflict in the future. I’m curious about your thoughts. Have a great day
    -Bryan
    Fast Weekly recently posted…Blog Posts (and videos) I Enjoyed This WeekMy Profile

    • Pretired Nick on January 6, 2014 at 12:57 pm said:

      Yeah, Bryan, like you, I had always previously refinanced and computed the payback period when I wanted to lower a payment. Since we already had a low rate, this worked out great for us.
      I was wondering if someone would pick up on our debt structure. There are two ways unequal debt and/or age can cause resentment. One is that the person who keeps working resents heading into work each day while the other person hangs around the house. The other way is that the older person resents working until they’re 55 to help the younger/poorer person finish earlier as well. But if we assume we have roughly equal lifespans, we think it’s more fair that we both finish work at a young age, vs. both finish in the same year. Would it be “fair” that I pay for 75% of our mortgage and work until I’m much older? Or is it more fair that we each pair our half of the debt and work until roughly the same age? We chose the latter, but I do think we’re somewhat unusual in how we look at things.

  3. Huh, I didn’t even know something like that existed. Of course, I rent so it doesn’t help me out at the moment but it could come in handy later down the road. It sucks though that the other bank didn’t offer that option. I wonder though if you could coerce them to make an exception for that though. I mean, if you flat out told them to either do I recast or you would refinance with another institution. You would think they would take option A so they can keep you on as a customer and still make some money vs letting a competitor gain it.
    Micro recently posted…2013 spending in review and 2014 budgetMy Profile

    • Pretired Nick on January 6, 2014 at 7:14 pm said:

      If and when you’re ready to get a mortgage, ask up front if the bank offers it and try to choose one that does. It could be very worth it down the road.
      Our other loan is BofA so I doubt we can threaten them, but we have some other plans for taking care of that one.

  4. Hmmm, I just learned something new! I know our credit union (both of our credit unions actually) allow us to reboot our mortgage rate by paying a fraction of a percent, and my understanding is that the loan automatically re-amortizes at the same time.
    Justin @ Root of Good recently posted…Enjoying Four Months of Early RetirementMy Profile

  5. Wow, I guess it is true that we learn something new every day!
    I am glad that the low costs worked out for you. I am just shocked, however, because I thought that there were always bills to be paid, but apparently at one point in our lives we can be debt free :)
    Keep up the good work!
    David recently posted…China’s Rise in 2014My Profile

    • Pretired Nick on January 6, 2014 at 7:40 pm said:

      Heh! Absolutely, David! All bills are optional, it’s just a matter of choosing which ones you feel are needed!

  6. Diane C on January 6, 2014 at 9:00 pm said:

    I married for the first time at the ancient age of 54. My DH is a widower with two grown children. We co-mingled all of our assets and I retired early at his suggestion. I could not have done so without his excellent health insurance. He is two years younger than I am, likes his work and will retire with a generous pension in about ten years. We are in the process of selling both of our houses and buying a new one, and his mother is now living with us. She was diagnosed with Alzheimer’s less than a month after we got married. No, I didn’t sign up for this duty, but we’re in this together. I joke that I have a rich husband; he calls me his rich wife. We are both right.

    All of this is just background information, so you’ll know where I’m coming from. My question is: will you please elaborate further on why you decided to retire early but have arranged your finances so that your wife is unable to stay home with your child? You made the point that you are older, but is this her fault? Seems to me that you decided to marry someone who is younger and has fewer assets than you do. Is that her fault, too? I hope I’m mis-reading this, but it sounds like you expect your marriage to be an exact 50/50 proposition and that you have an acute sense of “fair”.

    Yeah, I picked up on your debt structure, all right. You say this arrangement is what you (plural) chose, but it seems as though you are holding more of the cards and are intent on keeping the score in your favor. Does your (younger, less asset-laden) wife really have any choice but to go along with this arrangement of yours? If so, my heart aches for her.

    • Pretired Nick on January 7, 2014 at 8:35 am said:

      Thanks for your comment, Diane! It’s always fun to have someone challenge me!
      I wouldn’t say I’m “retired” and in case you haven’t read past articles, I pay all my own bills and still do consulting part-time.
      But I think your perspective is colored by your personal gender biases. For decades, sociologists have been insisting men get more involved in parenting. Well, OK, here I am. Are you saying only women can raise children or that only women should? Would your heart ache for me if I went back to work and she stayed home? Why not? Should she sacrifice her still-ascending career to raise our son while I die early at my desk? Because I’m a man? Or would your heart ache less if we both worked and outsourced our child-rearing to strangers? Our finances aren’t arranged in such a way to prevent her from staying home, our finances are set up so I can.
      The idea that men should be the breadwinners and die younger from overwork and exhaustion while women get to hang around at Starbucks with other moms is as outmoded an idea as the idea that women shouldn’t have careers. Unlike you, however, I don’t feel anyone should be supporting me and I pay all my own bills. If I didn’t have these additional assets, I’d still be working — but so would she. So her situation is no different, except that thanks to my guidance, she’ll be able to quit working for good in her early 40s (much earlier than me).
      Pretired Mama and I both agreed we wanted one or both of us to be home with our baby at least for the first couple years. Because I was more financially able to do so and because I had side income, it made much more sense for it to be me. Even though I’m a man.

      • Diane C on January 7, 2014 at 12:22 pm said:

        “But I think your perspective is colored by your personal gender biases.”

        Thanks for the chuckle, Nick. I must have failed to adequately make my point, as you missed it so completely. My concern was your focus on keeping things 50/50 in your family, even though you are the one holding the majority of the cards. You insist on getting credit for what you had amassed prior to your marriage, as if that is somehow your wife’s “fault”.

        Whether you work full time, part-time or not at all isn’t really the issue. Nor is gender. Further, I did not comment for the sake of amusing you; my intent was to provide you with another perspective. The fact that you consider it “fun” rather than food for thought is telling. What would have been really cool is if you had said, “I’ll think hard about this, discuss it with my wife and perhaps seek the counsel of people I know with strong and long-lasting marriages”. Had you done so, I would have been really impressed.

        • Pretired Nick on January 7, 2014 at 1:49 pm said:

          Well, since I have been happily married much longer than you, perhaps YOU should listen to ME. (:
          Once you can make the case that I’m doing something terrible to my wife by staying home with our baby, I’ll consider whatever point it is you’re trying to make. But since the alternative to me not working is daycare, I don’t think that does anyone any good, do you? The only other possible alternative is that I go back to work and she kills her career by staying home. Is that what you’re saying? And, again, why? Because she’s a woman?
          Glad we could give each other a laugh!

    • Pretired Mama on January 7, 2014 at 11:43 am said:

      Diane – Pretired Mama here, thought I would add my two cents. From your description, my situation sounds much like your husbands: I have a good job with excellent health insurance and (for the most part) I enjoy working, so in those areas, our families don’t sound that much different (aside from the flip-flopping on the traditional gender roles). I also encouraged my husband to pretire and to be the primary caregiver for pretired baby. I wanted Pretired Baby to have a close relationship with his dad and would much rather his dad watch him during the day than a daycare provider (given the choice).

      Sure, I would love to be home with the two of them what parent wouldn’t, but right now, that’s not financially possible (just need to save up a bit more)! I do not support my husband financially, nor does he support me. I’ve offered to help him out a bit (since he is loads cheaper than daycare), but he has so far refused and wants to make pretirement work on his own (and wants me to keep building up my pretirement fund). He is the exact opposite of what you imply in your comment – he is hardworking, fiscally responsible and no freeloader.

      I would not be on my own path to pretirement (hoping for my early 40′s) had it not been for him. It may not be traditional, but it works for us!

  7. Really cool idea, Nick. If we end up buying rental property with leverage, I’ll keep this option in mind.
    Done by Forty recently posted…What’s it Like in America?My Profile

    • Pretired Nick on January 7, 2014 at 9:04 am said:

      Yeah, it can be really handy anytime you need to restructure. Especially if you wanted to sell one property and increase your cashflow on the other one without an expensive refinance.

  8. Diane C on January 7, 2014 at 2:03 pm said:

    “He is the exact opposite of what you imply in your comment – he is hardworking, fiscally responsible and no freeloader.”

    Whoa, there! I never implied any of the above. He is, in his own words, a 50%-er. My opinion is that this is not fair to any of you.

    I do appreciate that Nick took the time to share my comments with you and your response. That’s a good start.

  9. I’m curious about your split finances as well – not in a negative way, but a logistical way! You guys live in Washington, right, which is a community property state, so you must have gotten a pre-nup that makes your income not community for that to really be the case.

    I’m also a bit of a gender role reversal in that I’m a woman making in the $160k-200k/year range per year in income and have about a $350k net worth at 25. If I don’t marry until 30, I’ll probably be a millionaire with a paid off $400k condo and $600k in investments, close to retiring early, and that’s pretty scary to walk into a marriage with.
    Leigh recently posted…2013 In ReviewMy Profile

    • Pretired Nick on January 28, 2014 at 12:48 pm said:

      Yes, you’re quite right that we have a prenup, which protects both of us. Then we have a separate joint bank account for paying bills and we each contribute the same amount to that account each month so it stays nice and even.
      If there’s any kind of differential at all in your relationship, getting a prenup is critical. You SHOULD be scared and be very careful. The good news is that a prenup is a really good way to make sure your relationship is about love and that the person you’re settling down with isn’t some gold digger.

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