bvvgc

Mortgages: Refinancing Vs. recast

For most of us, a home is the most expensive investment we’ll ever make, and it’s a good option. Throughout the scripture on the opening pages of Genesis, God speaks of the land as a possession and investment worthy of our efforts, saying in Jeremiah 29:5, “Build houses and make plans to stay. Plant gardens and eat the fruit they produce. “But getting the best deal on that land is a process!

Whether refinance or recast a mortgage cannot be answered with a simple yes or no. It would help if you considered a few things before choosing the best option.

Refinancing a mortgage is typically driven by a desire to get a lower interest rate on your loan, which lowers the cost of what you’re paying to borrow money. It involves, first, a credit check, fees based on the size of the mortgage, and a legal process similar to the one you went through to get the loan.

Much less well-known is the recasting of a loan. Banks don’t like to advertise this option because they make less profit in the process, and not all loans qualify. (For example, getting approved to recast a variable rate loan is more challenging.) But if your mortgage loan allows, recasting involves putting cash on top of the principal (the amount you borrowed) and then recalculating the loan for lower payments. Your actual interest rate stays the same for the length of your mortgage (a 15-, 20-, or 30-year loan is still that), but the net effect is that you owe less money upfront and now have a lower monthly payment.

Typically, you’ll need at least $5,000 to put down on the mortgage to get approved. A good reason to make changes is if you have a “huge loan,” a large loan the bank can charge a higher interest rate. Exceeding that federal limit could be a good measure.

Lists these reasons to consider a recast:

  • You are self-employed or have poor credit, making refinancing a problematic proposition.
  • You recently refinanced your mortgage and didn’t want to pay the cost and hassle again.
  • You received an inheritance, and you think it is better to apply it to your mortgage instead of investing it.
  • You foresee problems down the road, say a downturn in your industry, and you want to lower your monthly mortgage payments to prepare for that.
  • You usually invest spare cash in the stock market, but the outlook is so bleak that you could lower your mortgage. This is especially true if you also have a high mortgage and can’t refinance.

I see the real advantage of recasting as a direct reduction in total debt and lower monthly payments, regardless of motivations.

As for the other option, a real downside to refinancing is that you spend money on fees that don’t reduce the principal on your mortgage but also reset your note’s amortization. This means that you start paying more interest on your mortgage.

Both options require cash and offer the opportunity to lower your monthly payments. Recasting will reduce your mortgage. Refinancing will give you a lower interest rate and possibly a lower overall cost of your mortgage.

But getting rid of a mortgage has other financial implications. The Wall Street Journal notes: “There are downsides to the (recast) strategy. Many financial experts advise against putting extra cash in one’s residence, arguing that higher returns have historically existed in financial markets and interest rates on bonds are likely to rise over time. They also warn of the potential tax consequences of taking out a mortgage early because mortgage interest on a primary residence may be tax-deductible.”

While I don’t buy those arguments, it’s essential not to forget the value of cash on hand for a day of disaster.

In “The SALT Plan,” a book I wrote about preparing for financial disasters, I note that the Bible recommends that people save 20 percent of their income in good times to prepare for bad. You never know when you could lose your job or your health could be in danger. If you modify your loan and then lose your job, you won’t be able to get it back unless you sell your home or borrow equity in your home.

In an uncertain world, carefully consider all of your available cash options.

Refinancing makes sense to lower the cost of debt based on your interest rate, and reformulating makes sense if you have enough savings and other investments (such as retirement) in order. But make sure you have resources available in reserve to meet strange events.

Then there are the pros and cons of each option.

From a biblical perspective, I believe it’s best to have enough money in an emergency savings account, work to pay off your mortgage, and become debt-free. Without knowing more about your circumstances, I would lean toward recasting but keeping your monthly payments the same and applying the maximum possible amount toward your mortgage reduction each month.