Cash-out refinancing may take up the billboard space, vie for attention in your social media feed, and fill the airwaves with radio and podcast commercials, but you actually have another option for lowering your mortgage payment.
It's called mortgage recasting. Few homeowners know about it. Many might want to do it.
What we will cover.
- What is mortgage recasting?
- How mortgage recasting works
- Mortgage recasting vs. refinancing
- Example of a mortgage recast
- Requirements to recast a mortgage
- Mortgage recasting vs. extra payments on the principal
In a nutshell: A mortgage recast is when your payments are recalculated and set within the original terms of your loan. You keep the interest rate. You keep the same end date; for example, if your mortgage will be paid off 23 years from now, so will the recast.
How Does Mortgage Recasting Work?
Before considering a mortgage recast, you must be prepared to reduce the loan principal with a large payment. Generally, people are curious about mortgage recasting when they find themselves able to make a big payment on the mortgage, such as after an inheritance or the sale of an expensive automobile.
Another common scenario is when people buy a new home before selling the old one; once they get the proceeds from the sale, they use it to recast their new mortgage. In a sense, recasting is the ability to retroactively make a larger down payment.Find Your Best Lender
One strategy for using the windfall to reduce your mortgage principal is to make steady, principal-only payment with it while the rest of the windfall remains under your control, perhaps in a savings account or a CD earning interest. Another strategy is to ask your lender to recast the mortgage, which starts when you pay down a big chunk of the principal balance at once.
How Is a Mortgage Recast Different From a Refinance?
Unlike a mortgage refinance, which changes your interest rate (and might add years), a mortgage recast keeps your original interest rate and the original end date. If you secured one of the record-low interest rates during the pandemic, choosing a mortgage recast means you can keep that low interest rate. This is a huge advantage that mortgage recasting has over refinancing.
With mortgage recasting, you keep your original loan, whereas refinancing requires that you apply for a brand-new loan and pay closing costs again.
|Keep your low interest rate||✔|
|Shorten the term||✔|
|Lower your payment||✔||✔|
|Immediate equity boost||✔|
|Costs, fees are lower||✔|
|No new loan||✔|
Mortgage Recasting Example
Let's walk through an example of a mortgage recast. A homeowner who experiences a windfall faces two options for saving money: Make a big prepayment on the loan principal and keep the same payment, or request a recast of the mortgage to lower the payment.
- The Smiths have a mortgage for $275,000 at 6% fixed for 30 years.
- Their monthly payment is $1,649.
- They inherit $40,000 after taxes and wish they'd had that money for the down payment. The next closest thing they can do is to pay down the principal.
- Lowering the principal to $235,000 with a big prepayment will save the Smiths a lot of money in interest and bring them closer to the finish line, but their payment remains $1,649.
- If the Smiths ask their lender to recast the mortgage, the end date of the mortgage remains the same but their payment drops to $1,409.
In the long run, the Smiths would probably save more money making a giant $40,000 prepayment on the mortgage principal, but then they would be $40,000 poorer. A mortgage recasting, on the other hand, keeps the inheritance in their pocket (they can invest it and earn interest of their own) and saves them $250 every month.
“Generally speaking, recasting helps more with monthly cashflow, and extra principal helps shave interest off long-term.”
Recasting is not popular among mortgage lenders, which is why you never see it advertised. While you might be excited by an adjustment that will save you a lot of money without adding years to your mortgage, lenders perceive it as you wiggling out of giving them all the interest money they expected to make. To steer you toward other options, lenders may charge you as much as 1% of the principal balance for recasting, warns real estate investor and landlord James Smith.
What Is Required to Recast a Mortgage?
Here are typical mortgage recast requirements.
- Your loan must be current; delinquent loans cannot be recast.
- Loans may be recast only once during the life of the loan.
- The loan must be a conventional loan. FHA, USDA, VA, and other government-insured loans do not qualify.
- Freddie Mac (FHLMC) owned loans that have a second mortgage are not eligible.
- You must make a single principal reduction of at least 20% (or as low as 10% depending on the guidelines of the particular financial institution) of the current loan balance, or reduce the monthly principal and interest payment by at least $150 (again, this may vary). This monthly reduction does not include the escrow payment.
- A cumulative principal reduction does not qualify for a loan recast.
- Your recast request must be in writing. You will need to do the research to get the mailing address of your lender's recast department.
- The single principal reduction must be made within 60 days of your written recast request.
- The cost for a loan recast might be as little as $250 or as much as 1% of the principal balance, and will vary depending on the guidelines of the financial institution. You'll pay the fee with your principal reduction to initiate the process.
- A recast is also subject to other fees, such as for a title search and recording.
Is Mortage Recasting Better Than Making Extra Payments Toward Principal?
These two options for lowering the total interest your pay on a home loan are not mutually exclusive. You can do both, says mortgage expert Shashank Shekhar in San Jose, California. You could recast your mortgage now and continue to pay down the principal when your budget allows, such as if you receive a holiday bonus at work or you have paid off a vehicle loan and can redirect that money toward your mortgage principal.
Small but steady principal-only payments can save you a surprising amount of money in interest over time. "What I used to do was round up my mortgage payment to the nearest $100. An effortless way to accelerate payoff of my mortgage," shares Tennessee homeowner Steve Paul.
Convincing your lender to recast your home loan may be difficult, whereas you need nobody's permission to pay a bit extra toward the principal when you can. Penalties for small extra payments are mostly unheard of today. In fact, most online mortgage payment forms (screens) offer a field for entering any extra money you'd like to go toward principal that month. Nonetheless, it's a good idea to learn about any prepayment penalties/limits in your mortgage contract that might dictate how much extra you can pay each year.
Mortgage professional John Meussner of Fair Oaks, California, stresses that personal variables can make mortgage recasting a smart choice for one person, while extra payments toward the principal are better for another person. "As with most things mortgage-related, the correct answer with regard to the word 'better' really depends on your individual situation. But generally speaking, recasting helps more with monthly cashflow, and extra principal helps shave interest off long-term."
Tip: If and when you're able to make a principal-only payment large enough to get yourself over the threshold of 20% equity, do it, whether you recast the mortgage or not. Equity of 20% allows you to drop PMI, a monthly expense that has zero benefit for you.
Lowering the amount of interest you pay is a worthy pursuit for any borrower. "The goal of recasting and paying extra payments is to cut down on the amount of interest you're paying. They both accomplish the same thing," says Florida mortgage expert Lars Mitchell. "Recasting, however, ties up a large amount of money, whereas paying extra each month doesn't tie up any. … They are both great money-minded savvy strategies to get ahead on your mortgage."
Mortgage Recasting Key Takeaways
- A mortgage recast recalculates your payment under the terms of the original mortgage.
- Mortgage recasting requires a big one-time payment to reduce the principal.
- Unlike a mortgage refinance, a recast does not change your interest rate or the number of years left.
- Lenders are generally not enthusiastic about recasting, which is why you may never have heard of it.