Should You Recast Your Mortgage? Here’s What You Need To Know

For homeowners seeking to reduce their monthly mortgage payments without the hassle, credit checks, or expense of refinancing, mortgage recasting might offer a simple and cost-effective solution. But what exactly is mortgage recasting, and how does it differ from refinancing? This article breaks down the concept of mortgage recasting, compares it to refinancing, and explores the advantages and disadvantages to help you determine if it’s the right move for your financial situation.

What Is Mortgage Recasting?

Mortgage recasting allows you to reduce your monthly mortgage payments by making a large, one-time payment toward the principal balance of your loan. After this lump-sum payment is applied, your lender recalculates your monthly payments based on the lower principal amount while keeping your interest rate and loan term unchanged. The result is a reduced monthly payment without the need to refinance your mortgage.

Example:
Imagine you have a $300,000 mortgage with a 30-year term, a 6.5% interest rate, and a monthly payment of around $1,896.20. After several years of payments, your principal balance is now down to $250,000, leaving about 19.3 years (or approximately 232 months) on the loan.

If you make a lump-sum principal-only payment of $50,000, reducing the principal to $200,000, your lender can recast the mortgage based on the lower balance. The interest rate and remaining term remain unchanged, but the new monthly payment would drop to about $1,516.96. This adjustment results in a monthly savings of approximately $379.24, providing immediate cash flow relief without refinancing.

How Recasting Differs from Refinancing

While both recasting and refinancing can lower your monthly payments, they operate differently:

• Recasting keeps your existing loan’s interest rate and term but lowers your monthly payments by reducing the principal. Lenders typically charge a small fee, usually between $150 and $500, and do not require a credit check or a full loan application.
• Refinancing replaces your existing mortgage with a new loan, potentially with a different interest rate, term, or both. This process requires a credit check, appraisal, and closing costs that can range from 2% to 5% of the loan amount. Refinancing can be advantageous if current interest rates are significantly lower than your existing rate or if you want to change the loan term.

Example Comparison:
Assume you refinance the remaining $250,000 balance into a new 30-year mortgage at 5% interest, rolling in 3% in closing costs. This would result in a new principal of $257,500 and a monthly payment of about $1,382.32 — lower than the $1,516.96 payment after recasting. While refinancing offers a lower payment, it comes with higher upfront costs and extends the loan term, which could mean paying more interest over time if you keep the home for the full term of the refinanced mortgage.

Advantages of Mortgage Recasting

1. Lower Monthly Payments: By reducing the principal, recasting directly lowers your monthly payments without changing the interest rate or extending the loan term.
2. Minimal Fees: Recasting fees are significantly lower than refinancing costs, making it a cost-effective way to reduce payments.
3. No Credit Check Required: Since you’re not replacing the loan, lenders do not require a credit check or an appraisal.
4. Interest Savings: By paying down the principal early, you reduce the amount of interest you’ll pay over the remaining term of the loan.

Example:
A $50,000 lump-sum payment on a $250,000 mortgage at 6.5% interest could save you around $60,000 in interest over the life of the loan.

Disadvantages of Mortgage Recasting

1. Requires Significant Cash: You’ll need a substantial lump sum to make it worthwhile, which could limit your ability to invest or use cash for other financial priorities.
2. Limited Availability: Not all lenders offer recasting, and it’s generally limited to conventional loans — FHA, VA, and USDA loans typically do not qualify.
3. Interest Rate Stays the Same: If rates have dropped, refinancing could offer greater savings than recasting.
4. No Change to Loan Term: Recasting doesn’t shorten your loan term, so if paying off your mortgage earlier is a goal, this may not be the best strategy.

Is Recasting Right for You?

Mortgage recasting might be a good option if you’ve received a windfall such as a bonus, inheritance, or cash from selling other assets, and you want to reduce your monthly payments without altering your existing interest rate or term. It’s also a favorable choice if you’re looking to improve cash flow without the hassle and cost of refinancing. However, if your goal is to lower your interest rate or shorten your loan term, refinancing could be a more effective solution. Carefully weigh the upfront cost of refinancing against the lower fees of recasting to determine which option best aligns with your financial goals.

Summary:

Mortgage recasting can offer an easy way to lower your monthly payments without the cost and complexity of refinancing, but it’s not for everyone. If you have a substantial lump sum and are satisfied with your current interest rate and term, recasting might make sense. However, if interest rates have dropped significantly or you want to shorten your loan term, refinancing could provide greater savings. Carefully consider your financial goals and consult multiple lenders to explore which option best suits your needs.