Demystifying Mortgage Strategies: Recasting & Buying Points in 2024

Demystifying Mortgage Strategies: Recasting & Buying Points in 2024

By Sage Casaga and Robert Castillo

Has your real estate agent or mortgage lender, ever thrown around the term: “Buy Points” or “Recast a Mortgage?” In this higher interest rate environment, it is now more important than ever, to understand and make the best choices for your financial situation. Let’s break these two strategies down, starting with recasting:

 Recasting a mortgage is when you make a change to your existing mortgage, but not by refinancing or getting a new loan. Instead, you apply a lump sum payment toward the principal balance of your loan to reduce your monthly payment. This means that your loan is re-amortized by your lender using the same interest rate and term with the new lower balance. For example, you have a 30-year fixed mortgage with a balance of $200,000 and a 4.99% interest rate. In this case, your monthly payment would be $1,072.43. You decide to recast and pay a lump sum amount of $40,000, which brings down your balance to $160,000. As a result, your monthly payment goes down to around $857.94, lowering your payment by $214.49/month.

So, recasting a mortgage is like adjusting your repayment plan to make it more manageable without having to get a completely new loan. It's like fine-tuning your payment schedule to better fit your current financial situation. Make sure to work with a fiduciary advisor to talk through the pros/cons and run projections on what makes the most sense for your goals.

Mortgage points are essentially fees that a borrower pays a mortgage lender to get a lower interest rate on their loan. In other words, you are choosing to pay upfront (at the time of closing) in exchange for a lower interest rate and, therefore, monthly payment. A mortgage point equals 1 percent of your total loan amount – for example, on a $100,000 loan, one point would be $1,000. Buying points is also known as “discount points” and the typical reduction for the interest rate is 0.25% (for each point). Typically, you would only buy points to lower your interest rate on a fixed-rate mortgage. Buying points for adjustable-rate mortgages only provides a discount on the initial fixed period of the loan, so it generally isn’t done.

There are a few reasons why you may want to consider this strategy:

Paying Points to Lower the Interest Rate: Let's say you're getting a $200,000 mortgage, and the lender offers you the option to buy points. You decide to buy two points, which would cost you 2% of the loan amount, or $4,000 (2 points x $2,000 each). In exchange for paying $4,000 upfront, the lender agrees to lower your interest rate, often by 0.25% per point. So, if each point reduces your rate by 0.25%, and you buy two points, your interest rate might drop from 4% to 3.5%.

Tax Deductions: You may be able to deduct the cost of buying points (in the year you buy) on your income taxes (goes on Schedule A of the 1040 tax form); however, keep in mind it’s less interest that you can deduct in future years because the interest rate would be lower. 

Calculating the Break-Even Point: The exact amount you save will depend on factors like the size of your loan, the interest rate reduction per point, and how long you plan to stay in the home. It's important to calculate the "break-even point," which is the point at which the savings from the lower monthly payments surpass the upfront cost of buying points. If you plan to stay in the home long enough to reach the break-even point (can work with an advisor to calculate), then buying points initially may be financially beneficial.

Navigating the complexities of purchasing a house in today’s market demands careful consideration. It’s crucial to assess the initial expenses alongside long-term savings. Consulting with a financial advisor can provide valuable insights, before determining whether buying points or mortgage recasting makes financial sense and fits within your overall plan.

Sources: Lending Tree, Rocket Mortgage, US Bank, NerdWallet, The Mortgage Reports, AmortizationSchedule.org, Credit Union of Southern California

Gerber Kawasaki Wealth & Investment Management is an investment advisor located in California. Gerber Kawasaki Wealth & Investment Management is registered with the Securities and Exchange Commission (SEC). Registration of an investment advisor does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Gerber Kawasaki only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Gerber Kawasaki Wealth & Investment Management 's current written disclosure brochure filed with the SEC which discusses, among other things, Gerber Kawasaki Wealth & Investment Management's business practices, services and fees, is available through the SEC's website at: http://www.adviserinfo.sec.gov .

Sage Casaga and Robert Castillo are Financial Advisors of Santa Monica, California-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately ~$2.3B billion in assets under management as of 09/30/23. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss. Readers shouldn't buy any investment without doing their research to determine if the investments are suitable for their situation. “All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results."