A mortgage is often the largest monthly expense homeowners pay. The thought of reducing the amount of money you owe each month comes to mind for just about every homeowner at one point or another.
If you have a competitive interest rate and you’re pleased with the terms and conditions of your loan, how can you possibly lower your monthly mortgage payment? This is exactly where a mortgage recast becomes an attractive possibility.
What Is a Mortgage Recast?
When people talk about lowering their monthly mortgage payments, the term refinance is thrown around quite a bit. But a mortgage recast is not another term for refinancing. Rather, it’s a completely different term. So, what exactly is a mortgage recast?
Simply put, a recast mortgage is when the homeowner puts a large lump sums of cash towards the principal balance on the mortgage. From there, the lender will reamortize the mortgage loan, resulting in a lower monthly payment.
How a Mortgage Recast Works
How exactly does a mortgage recast work? To better understand a mortgage recast, let’s take a look at the following example.
Imagine a scenario in which you bought a home for $300,000. At the time of purchasing, you put down 10% of the total sale price of the home, and you agreed to pay off the borrowed $270,000 over the course of 30 years. You’ve owned the house for five years, so you now owe around $245,000 on your mortgage.
Now imagine what you could do if you came across a lump sum of cash in your sixth year of owning your home. If you don’t plan on investing the cash or purchasing anything in particular, you could choose to use the money to recast your mortgage instead.
If you were to choose this route, you would take that lump sum of cash and allocate it solely towards the principal balance on your home loan. For instance, you could go from owing $245,000 on your mortgage to $175,000 - although the exact value will depend on how much you put towards your mortgage during the recast process in the first place.
With this same example in mind, your mortgage still needs to be paid off in full within the next twenty-four years. But instead of paying $245,000 over the next twenty-four years, you’ll now only owe $175,000.
As a result, the mortgage lender can recast your mortgage and recalculate the amount of your monthly payment. Considering the fact that your outstanding principal balance has been reduced, you could also end up paying less money in interest each month.
Eligibility and Guidelines for a Mortgage Recast
If this sounds like something you’re interested in, keep in mind there are eligibility requirements and guidelines. Typically, a mortgage lender will have the following requirements before one can recast their mortgage.
- Generally speaking, the mortgage lender will require the homeowner to pay a certain dollar amount. If you have an extra $1,000, it’s unlikely you would be able to recast your mortgage. Many mortgage lenders require at least $10,000 to do so.
- The mortgage lender may charge a fee, typically a few hundred dollars, to do the administrative work involved with recasting a mortgage.
- The mortgage lender may also require the loan to stay as is for the next 2-3 payments before the recast rate goes into effect.
Mortgage Recasting vs. Refinancing
When one refinances their mortgage, they are not only changing the interest rate, they may also change the mortgage duration.
With that said, refinancing has tremendous benefits. If you previously purchased your home and received a high interest rate on your mortgage, you can save thousands of dollars if the interest rate has dropped and you refinance your loan at a lower rate.
A mortgage recast does not change the duration of your mortgage, nor does it change the interest rate percentage. It will only reduce how much money you owe each month.
Pros of Mortgage Recasting
There are three main benefits to a mortgage recast.
- Reducing your monthly mortgage payment
- A reduced monthly payment will lower your debt-to-income ratio
- Paying less in interest over the life of the loan
Cons of Mortgage Recasting
With that being said, there are disadvantages that must also be taken into consideration, such as:
- You may lose the opportunity cost of investing the money elsewhere.
- While increasing your equity, you can't borrow against your home.
How to Determine if a Recast Is Right for You
Determining if recasting your mortgage is right for you or not really requires figuring out the opportunity cost of the money you’d like to use to recast your mortgage.
For example, if you have $25,000 that you’d like to recast your mortgage with, how much money would that save you per month? Perhaps it saves you $50 a month or $600 a year. Could you have invested $25,000 and earned more than $600? If so, you’re leaving money on the table by recasting your mortgage. This is known as the opportunity cost of money.
Save Money Without Adjusting Your Commitment
When a mortgage recast is sought out, it provides people with the opportunity to save money on their monthly mortgage payment without impacting the terms and conditions or the commitment of their mortgages. A mortgage recast can be a great way to reduce your debt-to-income ratio, too.
If you ever come across a lump sum of cash of $10,000 or more, and you find yourself wondering how you should invest it, consider putting that money towards the principal balance on your mortgage. Not only will you establish more equity in your home, but you’ll also save thousands of dollars in interest over the remaining duration of your mortgage.
This page last updated: October 6, 2022