Cash is King it is said and few things in our lives suck up more cash than our housing costs. The average American spends over an estimated $450k throughout their lifetime on housing and a substantial amount of our monthly income. For those fortunate enough to own a home, often we find our mortgage to be inescapable and seemingly a payment to be made “forever”. Recasting can change this.
This does not need to be the case. While many are not in a position to pay off large amounts of capital, mortgage recasting can really work for those who are looking for an alternative option to reduce their monthly payments.
As always, pay yourself first. The strategies below are not recommended for those without emergency funds or other external investments. We always advocate for our readers to invest in tax beneficial systems like their 401k or IRA before trying to minimize their housing costs through these approaches.
Right, so what is Recasting?
Recasting is when an advance payment on your regular mortgage fees reduces your monthly costs by spreading the principal reduction across the remainder of your payment periods.
Why not just stop paying earlier?
Think about your cash flow and your % of outbound income. If you could get $200 a month off your mortgage now for the next 20 years instead of paying the same amount you are paying now for a longer period, that sounds pretty decent right? While you do still pay interest for longer, you’re still saving yourself money.
What about Refinancing?
Refinancing can work at times but isn’t always right because if the market has a higher rate than your current mortgage rate, you could actually end up paying more per month, even if you’ve made advanced payments. If you signed your mortgage at a time of low-interest rates and haven’t seen significant housing value growth then you may be facing a slight payment increase when you talk to banks. With recasting, you know you have a lower monthly payment and at the same interest rate your originally signed up for.
1. Reduce monthly outlays
You will help feel progress in the repayment of your mortgage. There isn’t a much better way to go about feeling progress on debts than lowering them or paying them off. We aren’t all lucky enough to have the cash flow to pay off our mortgage early as the average mortgage cost can be around $$$ per month.
2. Put that windfall to work
You are scaling down longer-term liabilities and storing wealth in a relatively safe asset, earning on average above inflation, but below the stock market over a long period.
3. You’re on Fixed Income
Retirement or reduced wages will feel like a lighter burden when you cut down your monthly costs a bit. With the average Social Security check being relatively small and traditional annuity investments for retirees facing an ever tighter investment landscape, using $5000 to shave off a small monthly payment can put cash back in a retirees pocket that they may desperately need if they haven’t paid off their mortgage debt.
4. You are putting money back in your pocket
Long run interest is limited or lessened as a result. It may not be as much as if you paid the principal directly without altering your payment schedule, but it can be worth it in the long run over the traditional model of payment.
5. Inflation barrier and hedge
Inflation has been low for a while, but remember when Treasury bonds were in double digit percentages? Most traditional 30 year mortgages over the past 30 years have been at rates ranging from low to relatively high.
6. It can be virtually free
CitiBank offers 0 fee Recasts of mortgages while other banks offer them with specific conditions applied to a fixed charge or minimum contributions. Ultimately this activity is in the banks favor. If their customers pay off their mortgages earlier, the bank has less long-term leverage as they will accrue less interest and they have fewer opportunities to charge fees.
7. Reducing Home Equity Risk
Home Equity Loans are often a significant weapon in the arsenal of most Americans because they allow you to take out money from a bank using the principal of your already paid off loan as leverage. With more equity paid into your house, direct payments are not as necessary.
8. A fatter home equity pot
You’ve just stashed away more cash for down the line in an asset you can leverage. If home valuations go up, you have a solid balance paid off plus some ahead if schedule.
9. It can be repeatable
“Unlimited”. A term rarely heard in banking transactions with few fees. Unlike sometimes costly Refinancing events on mortgages, Recasting can occur many times over the course of a loan with little to no cost, making refinancing to reduce monthly payments a relatively costly event.
10. You can’t get access to it easily
Impulses in finance can seriously impede long-run returns on investment. Housing isn’t exactly like jumping on ETrade to purchase or sell a stock.
11. You may spend that money
Research shows that impulse purchases can put a serious dent in your long-term economic value. Hide that money from yourself. Additionally, aging and the effect on how people make choices can significantly impact are negatively correlated, meaning as we grow older we sometimes can make worse financial decisions.
12. Tax breaks aren’t what they used to be
The recent tax reforms under the Trump Administration reduction of tax benefits for those homeowners in some states, mortgage interest isn’t what it used to be.
13. Renting becomes a more serious option
If your place was just a little cheaper, wouldn’t you consider renting it? It’s become easier to rent both your primary or secondary residence over the years through a variety of new markets and home sharing services like Airbnb.
14. Your long-term ROI is better than cash
Cash doesn’t work for you. Your housing just may. Most savings accounts in America pay an interest rate of 4.23% in American whereas cash itself does nothing. Over time that potential opportunity cost can add up when thinking about reducing your interest due each month.
15. Traveling more is an option
I’m biased. Anything I can do to travel more, I’ll do. Recasting provides the option of ‘taking a break’ from work way more plausible. Unpaid Leave is usually a solid option for those looking to decompress or needing to spend some time somewhere else learning a language.
16. It’s a quantifiable return
Your equity in your house is not. Remember 2008? Yeah, I’d like to forget not having a job then too. Housing prices plunged, but have rebounded in most of the country, but this didn’t help anyone trying to offload their housing assets while paying down their debt.
Don’t just believe us, even the NYTimes and other personal finance sites are have covered recastings benefits and burdens in depth in the past.
If you think it’s an option worth exploring for yourself, call your bank today.