Dave Ramsey's Thoughts on Mortgage Recasting: A Closer Look at the Strategy and Real-Life Application

For homeowners looking for ways to reduce their mortgage payments or pay off their loan faster, mortgage recasting might seem like an appealing option. But is it truly beneficial in the long run? In a recent episode of The Ramsey Show Highlights, Dave Ramsey tackled this topic after receiving a question from a caller.

Dave Ramsey's Opinion on Mortgage Recasting

Dave Ramsey is known for his emphasis on financial independence and debt-free living, so it's no surprise that he takes a skeptical view of mortgage recasting. During the episode, Dave explained why he believes recasting isn’t necessary and can even be counterproductive for those looking to pay off their mortgage quickly. Here are the key points of his argument:

Recasting Keeps You in Debt Longer

Recasting a mortgage lowers your monthly payment by recalculating the amount owed over the original loan term, which keeps you in debt for the same amount of time. For instance, if you have a 30-year mortgage and 19 years remaining, recasting won’t shorten the loan term. Instead, it simply spreads the remaining balance over those 19 years at a lower monthly payment. Dave’s view is that while this might offer temporary cash flow relief, it ultimately keeps you in debt longer and doesn't accelerate your path to paying off the mortgage.

Recasting Doesn't Save You Significant Interest

While making a lump-sum payment on your mortgage can reduce the interest you pay over time, recasting doesn't offer significant interest savings compared to simply making extra payments toward the principal. Dave emphasized that recasting doesn’t change the interest rate or loan term, and the interest you pay each month is still based on the outstanding balance. The only way to reduce the total interest paid is to pay off the loan faster. In other words, while recasting lowers your monthly payment, it doesn’t significantly lower your overall interest charges unless you continue making extra payments toward the principal.

Focus on Paying the Principal

Dave’s primary recommendation for homeowners is to focus on making extra payments directly to the principal rather than recasting. By doing so, homeowners can reduce the mortgage balance faster, which lowers the amount of interest charged each month. For example, if you have a 6% mortgage and pay an extra $1,000 toward your principal, you immediately reduce the balance on which the 6% interest is calculated. As a result, more of your regular payment goes toward paying down the principal in subsequent months, helping you pay off the mortgage more quickly.

Avoid Lengthening Your Debt Timeline

One of the key reasons Dave advises against recasting is because it can make homeowners feel financially comfortable with lower payments, potentially leading them to stop paying extra toward the principal. While the monthly payment reduction may provide temporary relief, it lengthens the time you're in debt. Dave's philosophy is simple: the faster you pay off your mortgage, the faster you can achieve financial freedom. Recasting, in his view, runs counter to this goal because it doesn’t accelerate the payoff process.

Real-Life Case: Betty’s Situation

The discussion about mortgage recasting on The Ramsey Show Highlights was sparked by a question from Betty, a caller from Michigan. Betty explained that she and her husband had been making extra payments on their mortgage, which was their only remaining debt. They still had 19 years left to pay on their mortgage but had been looking for ways to manage their payments more efficiently. Initially, they considered refinancing to lower their payments, but after realizing it wouldn’t make a significant difference, they decided against it. Betty then asked Dave about recasting and whether it was a good option for them.

Dave's Advice to Betty

Dave advised Betty that recasting wasn't necessary, especially since she was already making extra payments toward the principal. He explained that recasting would simply lower their monthly payments but wouldn't help them pay off the mortgage faster. Instead, Dave encouraged Betty to continue making extra payments toward the principal without recasting. By doing so, they would reduce their balance more quickly, shorten the loan term, and ultimately save more on interest.

Betty’s case is a common one for homeowners who have some extra income and are looking for ways to make their mortgage more manageable. However, Dave's point is that recasting only changes the structure of the payments, not the debt itself. If the goal is to become debt-free faster, recasting isn't the best option. Paying down the principal directly is the more effective approach, as it reduces both the balance and the interest owed over time.

Comparing Recasting to Refinancing

It’s important to distinguish between recasting and refinancing, as Betty initially considered refinancing as an option. Refinancing involves taking out a new mortgage at a lower interest rate or shorter loan term, which can result in lower monthly payments or reduced interest costs over the life of the loan. However, refinancing can come with significant fees, including closing costs, which may outweigh the benefits for some homeowners.

In Betty's case, refinancing wouldn’t have provided much of a financial benefit, and Dave recommended that she stick with making extra payments. Recasting, while less expensive than refinancing, still wouldn’t provide the long-term payoff advantages that simply paying down the principal does.

Conclusion: Dave’s Simple Approach to Paying Off a Mortgage

In the end, Dave Ramsey’s advice is straightforward: mortgage recasting isn't necessary if your goal is to pay off your mortgage quickly and save on interest. While recasting lowers your monthly payments, it doesn't shorten the loan term or provide significant interest savings unless you continue making additional payments. For homeowners like Betty, who are already making extra payments on their mortgage, Dave advocates for staying the course by focusing on reducing the principal without complicating the process with recasting.