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Homeowners who want to shave off dollars from their mortgage payments, as well as save money on interest, might consider a mortgage recast. It’s fairly easy to do, and a relatively easy way make your monthly payments more manageable. However, this strategy won’t help you pay off your mortgage early, and it’ll require a big cash comittment up front.
Let’s look at recasting mortgage loans, from what it is to what it can do for you.
What is mortgage recasting?
What is recasting a loan? 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. A recast mortgage does not, however, affect your interest rate or the terms of your loan.
Recasting mortgage loans is one form of prepaying a mortgage.
How mortgage recasting works
To do a mortgage recast, borrowers must make a large lump-sum payment toward the loan principal. Lenders usually require $5,000 or more before recasting mortgage loans. The remaining balance is then amortized to 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 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 toward a mortgage recast, 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 some of the big banks offer it.
You’ll likely need to meet specific equity and principal reduction standards to qualify for a recast loan. 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, which they probably are right now.
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 end up with a new mortgage as well as a new interest rate.
Borrowers typically do this to get a lower interest rate, to go from an adjustable-rate mortgage to a fixed-rate mortgage or to cash out some of the equity in their home. If you already have a fixed-rate mortgage with a low interest rate, then a refi wouldn’t help you, especially in light of the current high interest rate environment. To take cash out of your home, you may want to instead consider a home equity line of credit (HELOC) or a home equity loan.
Benefits and drawbacks of mortgage recasting
Benefits of recasting mortgage loans
Recasting is appealing because it’s fairly easy to do and it’s a relatively inexpensive way to lower monthly payments. Here are a few reasons you might want to consider recasting your existing mortgage:
- Lower your monthly payments by making one lump sum payment
- Avoid having to requalify for a new loan
- Keep your interest rate if you currently have a low one
Drawbacks of a recast mortgage
The biggest financial drawback of recasting is that you’re putting a large sum of money into one asset: your home. 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
- More of your cash is tied up in illiquid home equity
- The lender charges a fee, although it’s typically no more than a few hundred dollars
In the current climate of high interest rates, a loan recast might be preferable to a refinance because it helps you keep your current rate, which is probably lower.
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.
Should you recast your mortgage?
First up, you should consider a mortgage recast only if you have a solid chunk of change on hand that you wouldn’t miss. If you don’t already have an emergency fund built up, start there instead.
Also, think through your current and future financial needs. If you plan to retire in a few years, a recast loan can help you keep expenses low when you’re on a fixed income. Similarly, if you’re planning to take a pay cut to pursue a new career path, recasting can help you make your budget more manageable.
Before you commit this lump sum to your home equity, though, explore your other options. You may want to talk to a financial advisor. Investing that money might be a smarter move, especially if you have a low interest rate on your mortgage.
Frequently asked questions about recasting a mortgage
This varies from lender to lender — and remember, some lenders don’t allow for a mortgage recast at all.Generally, you’ll need to have made several months of on-time payments in order to explore a recast mortgage. In some cases, this may be as short as six months. Ask your lender about their specific requirements.
Recasting and refinancing are two mortgage strategies, but they’re not the only ways to save. You can also explore options like getting rid of your private mortgage insurance (PMI) or making additional payments.
With additional reporting by Sarah Sharkey