What is a mortgage recast?
Have you scored a bonus at work? Come into some money from an inheritance or perhaps you’ve just saved up a nice little nest egg from your side hustle? Whatever the case might be, you can put that money to work by paying down your mortgage principal.
After you do this, you can ask your lender to recast your mortgage. They then recalculate your monthly payments based on the reduced balance. This means your future payments will be lower, although your interest rate and the length of your loan remain the same. It's a straightforward way to reduce your monthly expenses after paying a significant amount towards your loan.
This is the essence of a mortgage recast. You pay a big portion of your mortgage all at once, lowering your overall loan balance and reducing your monthly payments in the process.
You pay a big portion of your mortgage all at once, lowering your overall loan balance and reducing your monthly payments in the process.
How to recast a mortgage
While recasting is simple, the whole process can take several months. Remember to budget accordingly and keep making your regular mortgage payments until the new payment amount takes effect.
Here’s what to expect:
Reach out to your lender:
Ask if you’re eligible for mortgage recasting and look into any potential surprises like prepayment penalties or unique lender policies.Get it in writing:
Your lender will then send you a confirmation detailing how much you intend to pay off. You’ll also get to take a peek at your new, lower monthly mortgage payment.Send in that payment:
This often involves mailing a check and a signed letter saying you officially want to apply the payment to the principal and recast the remaining balance. Some lenders may also require electronic signatures and additional documentation, such as a government-issued photo ID. Along with the payment, you may also pay a recasting fee of several hundred dollars—small change compared to what you’d pay for closing costs on a refinance.Let the re-amortization begin:
After the lender processes your payment, they’ll recalculate your monthly payments by spreading out the smaller balance over your existing loan term. This is called re-amortization—and it can have an impact on your monthly budget.Look for confirmation:
Check the mail for a letter from your lender detailing your new payment amounts and the effective date.
How to qualify for mortgage recasting
It may seem like anyone with a mortgage and a good bit of savings is eligible for recasting, but that’s not the case. Before you get your heart set on those lower payments, it's important to see if you’re eligible. Here are some common requirements:
You can’t have a government-backed loan
If your loan is backed by the FHA, VA or USDA, you'll need to look at other options. These types of loans usually aren’t eligible for recasting.
You must meet minimum principal reduction standards
For mortgage recasting, most lenders require a minimum payment toward your principal. This amount varies, but it's usually a substantial figure.
You must meet equity requirements
You need to have enough equity in your home to qualify for a recast. It can be a fixed dollar amount or a percentage of your principal balance.
You must meet your lender’s payment history requirements
A good payment history shows your lender that you're a responsible borrower, which is key when requesting a recast.
Should I recast or refinance my mortgage?
Deciding whether to recast or refinance your mortgage depends on your financial goals and current situation. Here’s a look at the pros and cons of recasting vs. refinancing:
Recasting your mortgage
Now that you know a bit about recasting, what could it mean for your home loan? In the long run, it can be a smart financial move, since you’d save on your monthly mortgage payments. But recasting does require a sizable financial commitment upfront, which could leave some homeowners feeling “cash poor.”
Mortgage recasting
| PROS | CONS |
|---|---|
| Save on mortgage payments by making a lump-sum payment towards the principal to reduce your monthly payments. | You need to have a significant amount of money available for the lump-sum payment, which can be as high as $10,000 or more, depending on the lender's policies. |
| You may be able to say goodbye to PMI. If mortgage recasting drops your principal balance below 80% of the home's value, you may not need private mortgage insurance (PMI). | It's not offered by all banks. Some lenders won’t let you pay down a big piece of your mortgage principal and will apply it to future payments instead. |
| If you're happy with your current rate and loan term, you can keep it while still lowering your monthly payments. | The rules vary by bank, from the minimum lump-sum payment to the timeframe when your recasting must be completed so it's best to do your research before jumping in. |
| Recasting a mortgage is a straightforward process with minimal fees, especially compared to the longer and pricier refinancing process. | If you’re writing off your mortgage interest, recasting may impact those deductions. Always keep your tax advisor in the loop to understand how recasting might affect you at tax time. |
Refinancing your mortgage
Thinking about a traditional refinance instead? It could be a smart move, especially if your credit is solid enough to get you a good deal on the new loan. But you’ll want to make sure that the money you save in the long run will more than make up for any initial fees you have to pay out of pocket upfront. Let's dive into the pros and cons to see if refinancing is the better option for you.
Mortgage refinancing
| PROS | CONS |
|---|---|
| No matter what kind of mortgage you have, refinancing is an option. Whether you want to shorten your loan term, extend it, snag a lower interest rate or switch to a different loan type, refinancing makes it possible. | Getting a new loan through refinancing is pricier than a mortgage recast. Expect to pay a pretty penny for fees like title charges, appraisal fees and other closing costs. |
| Not happy with your current lender? Refinancing gives you the freedom to choose a lender who might offer better service or more favorable terms. | Refinancing means you're essentially starting over with a new loan. So, just like a new loan, a big portion of your initial payments may chip away at the interest rather than principal. |
How to calculate your mortgage recast
Want to do some quick math to get an idea of what your new payment would look like?
Imagine you currently have a mortgage balance of $200,000, and you have 240 months (20 years) left on your loan term. You decide to make a lump sum payment of $30,000 towards the principal. Let’s break it down step by step:
STEP 1
First, let's map out the terms of your loan, your current mortgage balance and how many months you have left on your loan term.
| Type | Amount | |
|---|---|---|
| Mortgage balance | $200,000 | |
| Remaining loan term | 240 Months | |
| Interest rate | 4% | |
| Original monthly payment | $833.33 (principal) + $666.67 (interest) = $1,500 | |
| Lump-sum payment | $30,000 |
STEP 2
Next, subtract your lump-sum payment from your current mortgage balance to get your new balance.
- New Mortgage Balance: $200,000 - $30,000 = $170,000
STEP 3
Then, divide this new balance by the number of months you have left in your loan term for the new principal amount:
- Monthly Payment (Principal Only): $170,000 / 240 = $708.33
STEP 4
Next, calculate the interest per month:
- Monthly Interest Payment: ($200,000 x 4% / 12) = $666.67
STEP 5
Finally, add the recalculated principal monthly payment to the unchanged monthly interest payment:
- Total New Monthly Payment: $708.33 (new principal portion) + $666.67 (interest portion) = $1,375
After making a lump sum payment of $30,000, the new estimated monthly payment would be approximately $1,375, down from $1,500.
Remember to talk to your lender to get a more exact breakdown and to see if mortgage recasting is an option for you.
