Most homeowners know about refinancing, but far fewer have heard of mortgage recasting. A recast lets you make a large lump-sum payment toward your loan and then have your lender recalculate your monthly payment based on the new, lower balance. Your interest rate and loan term stay exactly the same, but your payment drops. For homeowners who have a good rate already and come into extra cash, recasting can be a simple and inexpensive way to free up room in the monthly budget.
How mortgage recasting works
When you make extra payments on a standard mortgage, your balance goes down and you will pay the loan off sooner, but your required monthly payment usually does not change. A recast changes that. After you pay down a significant amount of principal, you ask your lender to re-amortize the loan. The lender spreads the remaining balance over the remaining term at your existing rate, which produces a smaller required payment. Most lenders require a minimum lump sum, often $5,000 to $10,000 or more, and charge a one-time administrative fee that typically ranges from about $150 to $500.
A simple example
Imagine you borrowed $400,000 five years ago on a 30-year mortgage at 6.5 percent. Your principal and interest payment is about $2,528 a month, and your balance today is about $374,400. If you put $50,000 toward the principal and recast, your new balance of about $324,400 would be re-amortized over the remaining 25 years at the same 6.5 percent rate. Your new payment would be about $2,190, roughly $338 less each month. You also save a meaningful amount of interest over the life of the loan, because the balance accruing interest is now smaller.
A recast keeps your rate, your term and your lender. Only the balance and the monthly payment change.
Recasting compared with refinancing
Refinancing replaces your current loan with a brand new one, often to get a lower rate or change the term. It involves a new application, a credit check, an appraisal and closing costs that commonly run 2 to 5 percent of the loan amount. Recasting involves none of that: there is no new loan, no credit check and usually no appraisal. That makes recasting especially appealing when your current rate is lower than today's market rates, since refinancing would mean giving up a good rate. On the other hand, if rates have dropped well below your current rate, refinancing may save far more than a recast would.
Who benefits most from a recast
Recasting is often a great fit for people who receive a large sum of money and want lower monthly costs. Common situations include buying a new home before selling the old one, then using the sale proceeds to pay down the new mortgage, receiving an inheritance, a bonus or a legal settlement, or approaching retirement and wanting to reduce fixed expenses. It can also help homeowners who want the flexibility of a lower required payment while still having the option to pay extra when cash flow allows.
Limits and drawbacks to consider
Not every loan can be recast. Conventional loans backed by Fannie Mae and Freddie Mac usually qualify, but FHA, VA and USDA loans generally do not, and some lenders do not offer recasting at all, so always check with your servicer first. Putting a large sum into your home also ties that money up in an asset that is not easy to access. Before recasting, make sure you have a healthy emergency fund, are contributing enough to retirement to receive any employer match and have paid off higher-interest debt such as credit cards. If your mortgage rate is low, investing the money could also produce a higher long-term return, though with more risk.
How to request a recast
Start by calling your loan servicer and asking whether your loan is eligible, what the minimum lump sum is and what fee they charge. Ask how long the process takes and whether you need to be current on payments, which is almost always required. Once you make the lump-sum payment, you will typically sign a short recast agreement, and your new payment will begin within one or two billing cycles. Keep copies of every document and confirm the new payment amount on your next statement.
The bottom line
Mortgage recasting is one of the most overlooked tools in home finance. If you already have a good interest rate and a lump sum available, it can lower your monthly payment quickly and cheaply without the hassle of a refinance. The right choice depends on your rate, your savings and your other goals. The mortgage advisors at Capital Growth Point can compare recasting, refinancing and investing side by side so you can see which option leaves you better off.
