You’ve probably heard of mortgage refinancing. It’s a popular option when a borrower wants to take advantage of lower interest rates or change their loan from an adjustable rate to a fixed rate mortgage. But there’s a less well-known cousin of the refi that you should know about: mortgage recasting.
Recasting, a much easier way to say re-amortization, lowers your monthly payment without disturbing the term or interest rate of your loan – or going through the process of refinancing.
How Does It Work?
Let’s say you come into a chunk of money. Maybe you get a hefty tax refund, a bonus at work, or an inheritance. You can take that lump sum – most lenders require anywhere from $5,000 to $50,000 – and request a recast of your mortgage. That amount is subtracted from the principal, and the new balance is re-amortized to get a lower monthly payment. The lender charges a relatively small fee for the recast, typically $100 to $500.[i]
Let’s break that down: You’re in your fifth year of a 30-year mortgage at 4.5% interest. The loan amount is $175,000. Your monthly payment is $886.70. If you put down $10,000 for a recast (plus the fee), that brings your monthly payment down to $836.03.
That doesn’t sound like much, but you end up saving more than $18,000 over the life of the loan.
Spend $10,000 now to save $18,000 later? That could be a pretty smart trade.
What Are the Benefits?
There are several solid benefits to mortgage recasting that can make it attractive if you have the cash for a lump-sum payment:
- Lower monthly payments for the remainder of the loan
- Lower total interest over the life of the loan
- No need to qualify for a new loan, as you would with a refi
- No property appraisal[ii]
- No income verification[iii]
- No credit check[iv]
Recasting does come with its downsides, though:
- The money you have for the lump-sum payment can’t work for you elsewhere, like in investments or savings
- It doesn’t reduce the length of your loan
- If your interest rate is high, recasting won’t bring it down
When Would You Recast and Why?
If you have enough cash on hand to pay the lump sum, you’ll probably want to make sure you use that money strategically. If you’ve hit the maximum contribution for your 401(K), all your other debt is paid, and you’re comfortable with your savings situation, then a recast may make sense for you.
Other situations where recasting might work well is when you’re between a home sale and a home purchase. You could use the money you get from selling your previous home to recast the mortgage on your new home, reducing your monthly payment.
Mortgage recasting is a little off the beaten path, so you’ll also need to find out whether it’s on the table at all. Some banks don’t offer it (virtually none advertise it – you’ll have to ask), and FHA and VA loans aren’t eligible.[v]
What About Putting the Lump Sum Into Savings and Investments?
This is largely a matter of personal preference. If paying off debt outweighs saving or investing on your personal financial scale, then sure – it’s your money to allocate.
Why Not Just Pay Extra on the Existing Mortgage?
The same money that could go into a recast could even more easily be used to make an extra payment on your loan. The choice lies in what you want to achieve. Both options will reduce the total interest you’ll pay over the term of the loan. Paying extra also brings down the term of the loan (say, from 20 years to 18); recasting reduces your monthly payment.
Why Not Refinance Instead?
There’s no guarantee that a refi will reduce your monthly payment, your interest rate, or the term of the loan. With recasting, you stay locked into your interest rate and the term of the loan – since you’re not getting a brand-new loan – and only the monthly payment comes down.
Ultimately, if mortgage recasting is a realistic option for you, you probably have other choices, as well. Weigh the pros and cons of recasting, refinancing – or even putting a down payment on a new home – and decide which is right for your situation and goals. And check out our Principal and Interest Calculator to help estimate options.