Alhambra Credit Union

Is Mortgage Recasting Right for You?

Don’t feel terrible if you’ve never heard of mortgage recasting—it’s not a financial option that’s highly advertised. However, it can have attractive benefits if you have cash on hand and if your lender offers this option to mortgage holders.

In short, a mortgage recast lowers your monthly payments and lessens the interest paid over the life of the mortgage when you make a lump-sum payment towards the loan total.

How it works, in detail

When you recast a loan, you apply a lump-sum payment toward the remaining principal (i.e. the balance, not counting interest) and then recalculate your monthly payments on that lower principal using the same term length and same interest rate. To get an idea of how much the new, lower monthly payments would be, use an amortization table online.

For example, let’s say you’re 10 years into a 30-year mortgage with a remaining principal balance of $200,000 with a 5% interest rate. Your monthly payment would be $1,200 per month. If you applied $50,000 toward that principal to recast your mortgage, plus a $250 recasting fee, you would eventually save about $35,000 in interest payments and roughly $300 a month in mortgage payments.

Now, you don’t have to apply a whole $50,000 toward your loan; most lenders have a $5,000 minimum to recast a mortgage—much more reasonable! However, there are usually fees of a few hundred dollars for the recasting process, and this should be taken into consideration when calculating if this move will save you money.

Things to consider

  • Does your lender allow mortgage recasts? Not all lenders provide this service.
  • Can your loan be recast? Some home loans, like Federal Housing Administration (FHA) and Dept. of Veterans Affairs (VA) loans, cannot be recast.
  • What's the minimum lump-sum payment to qualify? There will either be a minimum dollar amount, like $5,000, or the lender will calculate it as a percentage of the remaining principal balance, which can be as high as 10%.
  • What are the fees?
  • What will your new payment be? Find out how much of a difference your recast will make.
  • How much will you save on interest? You might save more if you make a lump-sum payment but don’t recast the loan. Recasting lowers your payment after you’ve reduced the debt so that you pay off the loan on the originally scheduled date, but you’ll pay down your loan faster and possibly save more money on interest if you continue making the higher original payment after making a lump-sum payment.

Recasting vs refinancing

Recasting and refinancing are both ways to pay less interest on a mortgage and change your monthly cash flow situation, although they work differently.

With refinancing, you are taking out a brand-new loan—hopefully with a lower interest rate—to pay off your old mortgage. You also start the clock all over again, ultimately lengthening the time it will take to pay off the loan. Refinancing also has more expensive closing costs, takes longer to close, and requires more paperwork, especially if you change lenders. Ultimately, you only save money if you get a much, much better interest rate.

With recasting, you keep your same loan with the same interest rate and same pay-off date. The fees are lower and there’s minimal paperwork. In the end, you’re saving money by lowering the loan total that your interest rate is calculated against, but it doesn’t change the interest rate itself. One of the drawbacks to recasting is that you tie up a large chunk of money in equity in your home instead of paying down credit card debt, creating an emergency fund, or investing in the stock market. You’ll need to decide if that money is better spent by saving you a little money each month with a new loan payment amount, or by keeping it available in a savings account or earning you returns in an investment.

There is a third option. Without refinancing or recasting your mortgage, you could simply apply the money toward your principal and keep your monthly payments the same. This will cut down on total interest paid and the number of payments and doesn’t require any paperwork or any fees!