Mortgage Recasting: What It Is and How It Works

Mortgage recasting is the process whereby you make a lump-sum payment on your mortgage, which reduces the principal balance and lowers your monthly payments. However, compared to refinancing, recasting won’t affect the terms of the loan or interest rate. You’ll have smaller payments and save on interest over time.

For example, if you have a 30-year, $500,000 mortgage with $450,000 remaining and you pay a $100,000 lump sum five years in, recasting would spread the new $350,000 balance over the remaining 25 years. With a 3.5% interest rate, your monthly payment would drop from $1,796 to $1,252.

However, if the lending company doesn’t offer a recasting option, you can still make a lump-sum payment to help in reducing your remaining balance. Your monthly payments won’t change, but you’ll pay off your loan faster.

How Does Mortgage Recasting Work?

Here’s how to recast your mortgage:

• Check Eligibility: The first thing you need to do is to contact your lender to see if your mortgage can be recast. Not all loans qualify, and some types, like FHA or VA loans, often don’t. Your lender will confirm if recasting is an option for you.
• Save for a Lump Sum: Find out the minimum amount required for the lump-sum payment, usually between $5,000 and $10,000 or up to 10% of your loan balance. Save this amount before moving forward.
• Request Recasting: Once you’re ready, formally request a recast from your lender. Be aware that there may be a fee, typically up to $500, which is much less than refinancing costs. After you have been approved for the loan, you can go ahead and make the lump-sum payment toward your mortgage.
• Continue Payments: While waiting to complete the recasting process, it is advisable that you keep making your regular payments. After your mortgage is officially recast, you’ll start making lower monthly payments based on the reduced balance.

Recasting vs. Refinancing

Mortgage recasting and refinancing are two ways to adjust your mortgage, but they work differently:

• Refinancing is about taking out a new mortgage to pay for and replace your existing one. This process includes paying closing costs and results in a new loan with a different interest rate. People do refinance to get very low rates and move from an adjustable to a fixed rate, or access some of their home’s equity.
• Recasting keeps your current mortgage but changes how it’s paid off. You make a lump-sum payment to reduce your loan balance, which lowers your monthly payments without altering your interest rate or loan term. If your interest rate is already low, recasting might be a better choice than refinancing because it allows you to keep your current rate while reducing your payments.

How to Qualify for Mortgage Recasting

To qualify for mortgage recasting, you need to meet certain things you need to keep in mind:

1. No Government-Backed Loans: You can’t recast loans backed by FHA, VA, or USDA.
2. Minimum Lump Sum: You must make a lump-sum payment that meets your lender’s minimum requirement.
3. Equity Requirement: Some lenders may ask you to have a specific amount of equity in your home.
4. Good Payment History: Your loan should be in good standing, meaning you’ve made payments on time.

Just so you know, these conditions and requirements make sure that recasting is a viable and good option for you.

Pros and Cons of Mortgage Recasting

There are lots of benefits and drawbacks you need to keep in mind before deciding if recasting your home loan is the right decision.

Pros

• No need for a credit check or appraisal.
• Your interest rate stays the same.
• Lowers your monthly principal payments.
• Generally has lower fees compared to refinancing.

Cons

• Not available for FHA, VA, or USDA loans.

• It requires a sizable lump-sum payment.
• May involve a small administrative fee.
• Doesn’t shorten the loan term or pay off the loan early.

How to Calculate Your Mortgage Recast Payment

To calculate your new mortgage payment after a recast, use a mortgage recast calculator. This will show you your updated monthly payment based on your reduced principal, while your interest rate and loan term stay the same.

For example, if you have a $400,000 mortgage at 6% interest with a 30-year term and you make a $50,000 lump-sum payment after 10 years, your monthly payment might drop from $2,334 to $1,976.

Remember, recasting only changes your principal and interest payments. Your escrow payments, which cover property taxes and insurance, remain the same.

Is Mortgage Recasting a Good Choice?

Recasting a mortgage might be a very good option if you have a lump sum to pay down your remaining mortgage balance and you want to lower your monthly payments and total interest costs without dealing with refinancing hassles. It’s especially a very good one if your current mortgage rate is lower than today’s rates. And you don’t need to extend your loan term.

This decision can be more appealing than refinancing, particularly with high current mortgage rates. It lets you keep your existing, lower rate while reducing your monthly payments, giving you more financial flexibility.

If you can manage your current payments but can’t meet the minimum lump sum for recasting, consider making extra payments towards your mortgage. This approach can help you pay off your loan faster and save more on interest compared to recasting.