Last year we moved from Tennessee to Texas. We sold our paid-for house, and purchased a new house that was about 20% more expensive than the one we sold. Due to the timing and not having a credit score, we had to take out a mortgage for the full amount of the new house before the sale completed on our old house. We had been reassured by our lender multiple times that once we got the check from the sale of the old house, we could roll it into the new mortgage and then perform a “recast”.
Late last year, after three months of living in our new house, we finally received a bill for our mortgage payment that reflects the recast that we performed. Last year I had not even heard of a “recast”, but now we have done one. And since I had worked for a company that tried to educate people about finances and never heard this term (no relevant matches as of this writing), there are likely others out there who have not heard of it as well.
What is a Recast?
A recast allows you to re-compute your mortgage atomization based on your current balance. This requires you to have made some extra payments, likely to the tune of thousands or tens of thousands of dollars. It does not change your interest rate, and it does not change the number of months you have left. If you have a 3.5% mortgage and you are 1 year into a 30 year loan, you will still have 3.5% and 29 years left at the end. But, you will have a lower monthly payment.
Why Recast instead of Refinance?
A refinance in 2020 averages somewhere close to $5,000. A recast, on the other hand, is usually between $200 and $500.
Now, you likely would want to do a refinance if you can get a lower interest rate, and plan on being in the house long enough that the savings in the lower rate offset the up-front cost. But if you aren’t sure if you will recover the cost of the refinance, the recast can be a cheaper option to save on monthly payments.
The Process For Us
Before starting, you must have some extra money lying around. In our case, we had the proceeds of a fully paid for house sitting in the bank. Maybe you got an end-of-year bonus, or an inheritance, or sold something really big.
Here are the steps that we followed.
- Notify the bank/lender that you want to do a recast. I called our lender, and was informed that I had to submit it via e-mail to a special address
- Wait for paperwork to come from the bank. This took us almost a month. The paperwork had the fee structure ($300), and the eligibility requirements. The main requirement from our lender is that we must have paid at least $10,000 extra towards the principle.
- Sign, notarize, and send the paperwork back.
- Make the large extra payment. In our case, we had already made two “smaller” $25k payments to get us underneath the LTV ratio to get rid of PMI as soon as we could. Once we completed step 3, I sent a wire for the remaining funds that we wanted to apply (close to $200,000) plus the $300 fee. The bank where we had parked our sales proceeds also had a wire fee, about $40.
- Wait …. and wait … and pray that the wire transfer made it
- Get proof in the mail that the recast was successful, showing the new payment.
- Wait for an actual bill to show up showing the correct P&I amounts
I’m not afraid to show real numbers for our house transactions, since most of them are part of public records.
|In the Bank*||$250,000||$0|
|Mortgage Balance||$345,000||$94,000 *|
|Loan End Date||August 2050||August 2050|
( * ) We actually had more money than this in the bank, but this money, from the sale of our TN house, was specifically earmarked for the recast. Also, the above math reflects about $1,000 in principle reduction through normal payments between the loan origination and the completion of the recast.
One Major Limitation
You cannot recast a FHA, VA or USDA loans. Because we went through manual underwriting, we ended up with a “conventional” loan. But, if you have a FHA loan, and have made some big payments, you may be able to go through a “streamline refinance“.
What We Could Have Done Differently
We could have avoided this process by doing a contingent offer, where the purchase of the new house would not be completed until the sale of our old house went through. Real estate agents on both sides, in TX and TN, said that due to the market, they were seeing that most offers being made with contingencies were rejected. The timing would have worked out for us in the end, but that was not a guarantee.
Years ago my wife and I had a goal to pay the house off early. Working for a place that preaches that concept further reinforced that goal. And we did. We did not have a mortgage from 2016-2020. That freed up about $1,000 per month for us to do other things. But to get there, I worked like crazy, 20 hours a week contracting for two years on top of my day job. I wonder how much more time I could have spent with our little kids, being less stressed out all the time.
I also wish we had done something to maintain a credit score, even just a credit card to run monthly subscriptions on. As nice as having the option of a recast was, we could have a lot more options when moving if we did not have to go through manual underwriting. It was not the super easy, barley an inconvenience thing that the “Christian finance personality” claimed it would be. With a decent score, we could have gotten a much better interest rate, could have qualified for a 15 year mortgage, likely could have afforded a house that was slightly more expensive than the one we purchased (there were a few we liked that were just out of our reach due to the manual underwriting), or could have explored building a house.
- The bank gave us a number we could call to check the status of our wire transfer. We were given an account number, which turned out to be at Bank of America. You call the number, enter the account number plus the dollar amount and the date (YYYYMMDD) that you sent the wire, and it will speak back to you all of the wires that came into that account that match those parameters. It turns out there were others with the same dollar amount. In retrospect, I wish I had wired an odd number, like $200,302, to make it stand out.
- I learned later that our lender allows for e-checks (ACH) of up to $99,999.99. Had I of known that earlier, I would have just sent them several e-checks instead of a wire. I had to pay $40 to our bank for the wire, and the e-check would have shown up on our mortgage account faster.