Mortgage recasting is a little-known tool that helps borrowers lower their monthly mortgage payments, without changing their interest rate. However, over time, these lower payments do help reduce the amount of interest borrowers end up paying.
Recasting doesn’t come without a cost. First, borrowers must make a large lump-sum payment toward the loan principal, which means trading fluidity for equity. In the current climate, with low mortgage rates and a strong market, this trade-off might not make sense for some. Second, there are usually fees associated with recasting. It depends on the lender but, typically, they don’t exceed a few hundred dollars.
Mortgage recasting qualifications and availability
Before you get excited about lower monthly payments, first make sure your lender offers recasting – many don’t. It’s also not something that’s normally advertised, but most of the big banks offer it, including Chase, Bank of America and Wells Fargo. Plus, not all mortgages qualify for recasting; some types of loans, like FHA loans and VA loans, can’t be recast.
How mortgage recasting works
If your lender does offer this service and your loan qualifies, they would reamortize your loan after you pay the lump sum toward the principal. All this means is that the lender will update the terms to reflect the new monthly payments based on the new and lower principal balance. Once that happens, you continue making payments to the same lender – only you owe less and pay less each month.
Recasting doesn’t reduce the length of your mortgage, just how much you pay each month.
Mortgage recasting vs. refinancing
There’s a big difference between recasting a mortgage and refinancing one, even though both can help borrowers save money. Recasting is easier than refinancing because it requires only a lump sum of money in exchange for lower monthly payments. With recasting, you’re keeping your existing loan and adjusting the amortization. You wouldn’t be able to get a lower interest rate with recasting, like you would with refinancing.
Refinancing, conversely, requires that you apply for a brand-new loan and pay all the fees that go with a new loan, such as closing costs and appraisal. The new loan would pay off your existing loan, so you could end up with a different type of mortgage as well as new interest rates.
People typically do this to get a lower interest rate or to go from an adjustable-rate mortgage to a fixed-rate mortgage. If you already have a fixed-rate mortgage with a low interest rate, then a refi wouldn’t help you. On the other hand, if you have a low-interest, 30-year fixed-rate mortgage and want lower monthly payments, then you might consider a recast.
The benefits of mortgage recasting
People have an appetite for recasting because it’s fairly easy to do and it’s a relatively inexpensive way to lower monthly payments if you have a lot of cash sitting around. Here are a few reasons you might want to consider recasting your existing mortgage:
- Lower your monthly payments by making one lump sum.
- Avoid having to requalify for a new loan.
- Keep your interest rate if you currently have a low interest rate.
The drawbacks of mortgage recasting
The biggest financial drawback of recasting is that you’re putting a large sum of money into equity. These are a few reasons you might want to rethink recasting:
- It doesn’t shorten the length of your mortgage.
- Your interest rate stays the same, a disadvantage if you have a higher interest rate.
- Your cash is tied up in equity.
Alternatives to mortgage recasting
The main motivator for people interested in recasting is to save money each month. However, because a hefty lump sum is required to get this benefit, Bill Rayman, vice president for mortgage lending at Guaranteed Rate, suggests there are far better ways to use that cash. According to Rayman, since putting your money in a house has a zero rate of return, borrowers should explore other investment options before going the recasting route.
“Even if you parked your money in a CD, you’d make something, and, more importantly, you’d have access to cash. In this market, you can choose from a wide variety of investment options. Whether it’s high-risk growth stocks or low risk with bonds or some mix in between, you’ll be earning something and you’ll have access to cash,” Rayman says.
Furthermore, Rayman cites the 2008 housing crash as an important factor in deciding whether to recast. By tying up large amounts of cash in a house, people could set themselves up for a big financial loss – especially since equity has no bearing on a home’s value, he says.
“The most dramatic thing people don’t realize about their homes is that it doesn’t matter at all how much equity they have in that home as it relates to how much that home is worth. The home’s value is established by the market. I’ve never had a buyer ask whether the seller owes 10 percent on the home or owns it outright. They don’t care,” Rayman says.
For borrowers who have other outstanding debt with high interest rates, such as student loans or car payments, it would make more fiscal sense to pay off that debt than to recast, Rayman says.