Homeowners looking to save money should consider a mortgage recast to lower monthly payments and interest costs.

If you're not struggling with cash flow, which means you have enough money left over after paying your monthly expenses, then making extra payments towards your mortgage principal can be smart. This will help you pay off your debt faster without applying for a new loan like you would with refinancing. You'll need to make a significant lump-sum payment, which your lender will use to recalculate a lower monthly mortgage payment. This will help you become debt-free sooner.

Before reamortizing your mortgage, consider if it's the best option.

What is a mortgage recast?

Mortgage recasting allows you to prepay your mortgage by making a lump-sum payment toward the balance. After you make the payment, your lender reamortizes the loan with the new, lower balance, resulting in a decreased monthly payment. It's important to note that despite recasting the loan, you will keep the same interest rate and loan term.

It's important to note that not all types of mortgages can be recast in the standard sense. Generally, FHA, VA, and USDA loans are not eligible for recasting. However, some lenders may use the recasting method to modify your loan if you have difficulty paying.

Your lender may require you to pay a minimum amount towards your balance for recasting. Being up-to-date on payments is usually a requirement.

How does recasting a mortgage work?

When you recast your mortgage, your new payoff schedule matches what it would have been, with each monthly payment adjusted to reflect the new balance.

In order to recast your loan, you will be required to make a one-time lump-sum payment. Lenders may require you to pay a specific amount and a fee of a few hundred dollars. It's important to note that if your lender doesn't mandate a minimum reduction, putting up a small amount won't be enough to justify the recast.

After paying off a portion of your balance, your lender will recalculate your monthly payments to include principal and interest and provide a new repayment schedule. 

Mortgage recasting vs. refinancing

Recasting a mortgage differs from refinancing. Both save money.

Refinancing involves applying for a new mortgage and paying its closing costs. The new loan will pay off your existing loan, resulting in a new mortgage and interest rate. People usually refinance to obtain a lower interest rate, switch from an adjustable-rate mortgage to a fixed-rate mortgage, or access some of the equity in their home.

Recasting is a more straightforward process that involves adjusting the amortization of your existing loan. However, it does not allow you to obtain a lower interest rate or a shorter loan term, which is possible with refinancing. Refinancing may be less beneficial if your interest rate is already low or lower than current rates. Recasting is a better option, enabling you to keep your current interest rate.

Pros and Cons of Recasting Your Mortgage

Recasting your mortgage has both advantages and disadvantages. Here are some of them.

Pros

• Recasting is often less expensive as you only have to pay a small flat-rate recasting fee instead of closing costs, typically associated with refinancing.
• There are no credit score or appraisal requirements, making it easier to recast your loan.
• You can keep your current interest rate with a recast. Still, with the refinancing process, you typically have to accept the current market rate.
• Suppose you have significant money to put towards your loan but need to be more specific about your future income. In that case, recasting can be an ideal solution for you. It lets you save on interest without taking on a higher monthly payment. This means you'll be able to lower your payment and effectively manage your finances.
• You can apply a lump sum directly to your principal balance. If your lender does not allow this, ask if they offer recasting.

 

Cons

• Please note that your lender may have a policy that does not allow you to apply extra payments to your loan principal. Instead, they may allocate your additional payments to the next month's payment. It's important to understand that although this will help you stay ahead on your payments, it won't reduce your interest charges.
• You may not qualify for recasting if you have a government loan, such as FHA or VA.
• To be eligible for a recast, you must make a minimum lump-sum payment, which can be either a specific fixed amount or a percentage of your principal. It's important to note that lenders usually require you to pay a fee in addition to the lump-sum payment.
• You can lower your monthly payment without changing your loan term.
• If you invest your cash in your home equity, you will need help to access it easily in the future. This means that if you need to use your home's equity at a later time, you will have to either refinance or take out a home equity loan.

How To Calculate Your Mortgage Recast

Your lender can provide information about mortgage recasts, but it’s always a good idea to calculate it yourself. One way to do this is by using a mortgage recast calculator. However, you can also calculate it manually. Let’s take a closer look at how to do it.

To lower your overall loan balance, you should determine the date you plan to make the lump-sum payment. After that, calculate your monthly payment for the remaining years on your loan based on the new balance, using the same interest rate. This will help you manage your payments and repay your loan faster. Make sure to double-check for any spelling, grammar, or punctuation errors.

For instance, if you have a 30-year mortgage with a balance of $200,000 and a 4.99% interest rate, your monthly payment would be $1,072.43.

You pay $40,000 upfront to reduce your balance to $160,000. Recasting can reduce your monthly payment by $214.49 to about $857.94.

Before deciding, calculate savings from extra principal-only payments on fixed-rate or fully amortized loans.

Bottom Line

Mortgage recast can be a valuable tool to lower your monthly payments without the need to apply for a new loan. The service fee charged for mortgage recast is relatively low, making it a straightforward way to allocate extra funds towards the principal amount and enjoy an immediate reduction in payment for the rest of your loan tenure.

However, you must note that a recast cannot change your loan term or interest rate. If you want a more favorable option to change those terms, consider refinancing your loan.