How to Recast a Mortgage for Lower Payments and Interest Savings
Pay a lump sum now for lower payments over the life of the loan
A mortgage recast is a way to possibly lower your monthly payments without getting a new loan. It can be an easy cash flow fix, and you can often save money over the remaining life of your mortgage loan. As with any type of borrowing, however, there are pros and cons.
How Recasting Works
A recast is a recalculation of your mortgage based on how much you currently owe. Presumably, you've paid down your principal since you first took out the mortgage. You will also be required to make an additional lump-sum payment and pay a small fee to recast. Your new mortgage terms will be based on the balance remaining after that lump-sum payment, typically for the same remaining term.
The minimum a lender might accept for that upfront, lump-sum payment can vary. Note that your monthly payment will not change significantly without a large enough lump sum.
You'll pay off the loan with fixed monthly payments just as you've been doing, and the payments generally don’t change over the life of your loan unless you have an adjustable-rate mortgage.
You don’t have to qualify for a loan all over again.
You’ll have smaller monthly payments…in most cases.
You can keep your interest rate if you managed to lock into a good one when you initially took out the loan.
Recasting will reduce your debt-to-income ratio.
You’ll most likely have to pay a fee, although they typically aren't too steep.
You’ll have to part with a lump sum of cash, which might deplete your savings.
You’ll remain locked into that interest rate if you got hit with a high one when you initially took out the loan.
You could end up paying more in interest overall if you extend your loan term.
How Loan Payments Are Calculated When You Recast
Payments are calculated based on several factors when you recast a loan:
- Debt amount: How much are you borrowing?
- Interest rate: You'll usually inherit this from your original loan.
- Term of the loan: This is the number of years you have to repay the loan.
The resulting monthly payment will change if you tweak any of these inputs, but loan payments typically don’t change after the loan is made. You can send extra money every month, but your lender won’t change your monthly payment unless you request and get approved for another recast.
Things to Consider When Recasting
Talk with your lender and ask about the process early on because you'll need some important information and details, such as:
- Does your lender allow mortgage recasts? Some don’t, and it’s not worth wasting your time if it’s not an option.
- What's the minimum required lump-sum payment to qualify? You might have to wait and save for a longer period. Minimums of at least $5,000 aren't uncommon.
- How much does it cost? You’ll probably have to pay a fee of several hundred dollars. Factor this in when you consider how long you’ll keep the loan. Again, you might want to wait and make a larger payment if the situation is right so you'll get more bang for your buck.
- What will your new payment be? Find out how much of a difference your lump-sum payment will make. It might not be as great as you hope.
- How much will you save on interest? You might actually save more if you make a lump-sum payment and 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 save money on interest if you continue making the original payment after making a lump-sum payment to reduce the loan balance.
Run the Numbers
Your mortgage lender can provide you with helpful information, but you might prefer to tinker with the numbers yourself. You’ll have to model how the loan gets paid off over time. This is known as amortization, and it’s not that hard to do.
You can calculate your loan’s progress by hand, but spreadsheets make the process easier. Pick a date when you’ll make the lump-sum payment and reduce your loan balance accordingly. Then calculate what the new payment would be, assuming the same payoff date. In other words, calculate 12 years if you have 12 years remaining on your loan. Don’t start over with a 30-year loan.
Now, look at the numbers to see how much you’re saving. Experiment with different payment amounts and find what works best for you.
An Alternative to Recasting
Recasting isn’t the only way to reduce your monthly payments. Refinancing your loan is another option.
Yes, fees are lower with a recast, and amortization—“the clock”—doesn't necessarily start over when you recast, as it does with a refinance. The recasting process can be easier and faster because you don’t need an appraisal, credit checks, or the underwriting required for a new loan. Finally, the interest rate you'll pay won't change with a recast, but it could change when you refinance. That said, if a refinance reduces your interest rate, that's a good thing.
Ultimately, recasting makes sense when you have extra money on hand and you already have a decent loan. Refinancing is generally the answer when you can do substantially better by wiping out the existing loan and starting fresh. Just be sure you don’t end up paying more interest overall by extending the life of your loan.