Homeowners who want to shave off dollars from their monthly mortgage payment, as well as save money on interest, might consider a mortgage recast. This strategy won’t help you pay off your mortgage early, but it can make your monthly payments more manageable while reducing the amount you’ll pay in interest.
What is mortgage recasting?
A mortgage recasting, or loan recast, is when a borrower makes a large, lump-sum payment toward the principal balance of their mortgage and the lender, in turn, reamortizes the loan. This means that your loan is reduced to reflect the new balance.
Recasting cuts your monthly payments and the amount of interest you’ll pay over the life of the loan. It does not, however, affect your interest rate or the terms of your loan.
How mortgage recasting works
In order to do a loan recast, borrowers must make a large lump-sum payment toward the loan principal. Lenders usually require $5,000 or more to recast a mortgage. The remaining balance is then amortized reduce the monthly payments.
Typically, you have to pay a fee to recast your mortgage. The fee varies by lender, but usually doesn’t exceed a few hundred dollars.
That fee can be worth it, however, when compared with your potential interest savings. Recasting not only results in lower monthly payments, but borrowers will also pay less interest over the life of the loan.
For example, if your 30-year mortgage carries a principal balance of $200,000 with a 5 percent interest rate, you might pay $1,200 per month. If you pay $50,000 in a lump sum to recast your mortgage, plus a $250 recasting fee, you’ll end up saving almost $35,000 in interest payments and about $300 per month in monthly mortgage payments. (Of course, the money you sink into the recast won’t be available for investing or other purposes.)
Keep in mind, recasting doesn’t reduce the term of your mortgage — just how much you pay each month.
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.
You’ll likely need to meet specific equity and principal reduction standards to qualify for a recast. Your payment history could also affect your options.
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, only adjusting the amortization. You wouldn’t be able to get a lower interest rate with recasting, like you might with refinancing. On the other hand, if your interest rate is already low then refinancing could have a negative effect — especially if the current rates are higher.
Refinancing, conversely, requires that you apply for a brand-new loan and pay all the fees that go with it. The new loan would pay off your existing loan, so you could end up with a new mortgage as well as a new interest rate.
Borrowers 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.
Benefits of mortgage recasting
Recasting has some appeal because it’s fairly easy to do and it’s a relatively inexpensive way to lower monthly payments if you have the cash. 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
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:
- Doesn’t shorten the length of your mortgage
- Your interest rate stays the same, a disadvantage if you have a higher interest rate
- More of your cash is tied up in equity
- Lender charges a fee, typically no more than a few hundred dollars
In the current climate, with relatively low mortgage rates and a strong market, a loan recast might not make sense for some.
How to calculate your mortgage recast
If a mortgage recast is the right move for your finances, make sure the math checks out. You can estimate your new monthly payment after the recast with the help of Bankrate’s amortization schedule calculator.
If you still have questions about your potential savings, consult with your mortgage lender. A loan officer can help you run the numbers and understand what the best strategy is for your situation.
With additional reporting by Sarah Sharkey