I’ve refinanced multiple property mortgages many times since 2003, but I’ve never recast a mortgage. The reason is mainly because my lenders did not offer recasting. But the bigger reason is because I always wanted to take advantage of lower mortgage rates.
Recasting a mortgage loan can be a good idea if you come into a lump sum of cash and want to reduce your monthly mortgage payment while also staying disciplined with paying off your mortgage based on the original schedule. Further recasting your mortgage loan allows you to avoid the cost to refinance.
If you have a small mortgage (<$300,000), it’s often not worth refinancing because the refinancing costs makes the breakeven time period too long. As such, a mortgage recast may be more beneficial.
What Is A Mortgage Loan Recast?
A loan recast means that while your interest rate and your loan term remain unchanged, your monthly mortgage payment is reduced to reflect your actual current loan balance.
For example, if you’re 5 years into a 30-year mortgage, once you recast your loan, you will still have 25 years remaining to pay it off. Whereas, when you refinance a mortgage, your amortization schedule resets back to 0. You’ll have to then spend the next 30 years paying off the mortgage if you don’t pay extra principal.
For recasting to work, lenders usually require an additional lump sum payment to reduce your principal balance. The larger your additional principal pay down, the more you can save with a loan.
Alternatively, you could pay down a lump sum on your existing mortgage and not recast. However, your total monthly mortgage payment amount doesn’t change.
The only thing that changes is the percentage mix of the payment that goes towards principal and interest. The more you pay down, the greater the percentage of your payment goes to principal.
Below is an amortization table which highlights the breakdown between principal paid and interest paid based on a $700,711 mortgage at an interest rate of 2.625%.
Notice how the principal paid portion goes up while the monthly and annual mortgage payment amount of $2,814 and $33,773 stays the same. If you just pay down principal and don’t recast, your mortgage payment will stay the same at $2,814 a month. It’s just the portion that goes to principal increases.
A mortgage recast helps lower your monthly payments.
How Does Mortgage Loan Recasting Work
A mortgage recast is a feature in some types of mortgages where the remaining payments are recalculated based on a new amortization schedule. During a mortgage recasting, an individual pays a large sum toward their principal, and their mortgage is then recalculated based on the new balance.
A mortgage recast does not involve a credit check and continues with the original mortgage.
Because you reduce the balance ahead of schedule, you ultimately will pay less interest. This then enables lenders to recast your loan, or recalculate your monthly mortgage payment.
If your lender allows you to recast your loan, you must come up with a lump sum payment to allow for a recast to happen. Usually, the lump sum payment is a percentage of the mortgage balance e.g. 10%, 15%, or 20%. In other words, the lender wants to see a borrower have more skin in the game.
Here are a couple examples of how a loan recast would work:
1) If you have a $400,000 mortgage at 4% interest for 30 years, your monthly principal and interest payments would be $1,910. If you pay the loan for 10 years, your remaining loan balance would be $315,136. A lump sum payment of 10% of the remaining loan balance would be $31,554, bringing the balance to $283,582.
In this case, the monthly payments would reduce to $1,718, a $192 decrease. Increase cash flow by decreasing expense is always great. However, you lose $31,554 worth of cash/liquidity in the process.
2) Let’s say you have a $500,000 30-year fixed mortgage with a 4% interest rate. Your combined interest and principal payment are $2,338 per month. After five years, you receive a $375,000 inheritance. If you decided to use the entire amount to pay down the mortgage without recasting the mortgage, you would continue to pay $2,338 a month. The percentage of the $2,338 going to principal each month would rise to over 80%.
If you recast the loan over the remaining 25-years of the mortgage, the monthly payment would go down to $1,507.
Please note that lenders do charge a small fee for loan recasting, which is often as low as $250.
Determining Eligibility To Recast Your Mortgage
Loan recasts are allowed on conventional, conforming Fannie Mae and Freddie Mac loans, but not on FHA mortgage loans or VA loans. FHA and VA loans already give borrowers a lot of benefits such as a lower downpayment and subsidized lower interest rates.
Some lenders recast jumbo loans, negative amortization loans, and option ARMS, but consider them on a case-by-case basis.
In order to qualify for a loan recast, you must be current on your loan payments, and have the cash necessary to pay down your principal balance. A credit check and an appraisal are not necessary.
Advantages of Mortgage Recasting
There are essentially four main advantages of mortgage recasting versus mortgage refinancing. They are:
- Reduced Payment. By paying down a lump sum, you will reduce your monthly payments.
- No Appraisal Required. Unlike a home refinance, a loan recast does not require an appraisal. The average cost of a home appraisal is between $600 – $800.
- No Credit Check Needed. Loan recasts generally do not require credit approval. This is great if you have suboptimal credit. The average credit score for a qualified mortgage is now roughly 760. If your credit score is lower, you will likely not get the best rate or you will be denied.
- Pay Down Your Loan Quicker. Not only may mortgage recasting be cheaper and easier to do, you’ll end up paying down your loan no later than your original amortization schedule, and likely quicker.
In one specific case, loan recasting can be particularly beneficial. If you are a homeowner who has purchased a new home before selling your current home, you may temporarily need to pay two mortgages. Once you have sold your previous home, you can use the profit from that home sale to pay down your loan balance and recast your mortgage to make the payments more affordable.
Disadvantages of Mortgage Recasting
Before you decide to recast your mortgage, here are some disadvantages to be aware of:
- Requires A Lot Of Cash. Before recasting your mortgage, make sure you have enough cash leftover after the required lump sum payment for general living purposes. If you have other debt at higher interest rates, it may be best to implement FS-DAIR and pay down other debt first.
- Doesn’t Reduce Mortgage Term. A loan recast will not shorten your loan term. It will just improve your cash flow and make sure you don’t keep resetting your amortization table, thereby increasing the likelihood of delaying the complete payoff.
- Your Interest Rate Stays The Same. A recast lowers your monthly payments, but it doesn’t lower your interest rate. If interest rates are at least 0.25% lower than your existing rate, and you can refinance with all costs baked it, it may be better to refinance. My latest refinance was for 2.625%. If I had recast my mortgage, I would be paying 4.5%, despite only having 25 years left. I plan on paying down extra principal each month to completely pay off the loan within 10 years, no later.
Do The Math Before Mortgage Recasting
Mortgage recasting is not a bad idea if you want to stay on your amortization table, like your existing mortgage rate, and have a lot of spare cash lying around.
I like to refinance my mortgage whenever there is a lower rate to be had and pay extra towards principal to stay on my same amortization table.
Whatever your preference, do the math before recasting your mortgage or refinancing your mortgage.
1) Refinance your mortgage. Check out Credible, my favorite mortgage marketplace where prequalified lenders compete for your business. You can get competitive, real quotes in under three minutes for free. Mortgage rates are back down to ALL-TIME lows. Take advantage!
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3) Take advantage of credit card rewards. I also recommending taking advantage of 0% introductory APR credit card offers. There are plenty of great credit cards with no annual fees that allow you to make a purchase and pay 0% for 12 – 15 months if you spend several thousand in the first three months of opening.
About the Author: Sam worked in investment banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends most of his time playing tennis and taking care of his family. Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.