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Recast Mortgage: Everything You Need to Know About Mortgage Recasting

A mortgage is often the largest monthly expense that people 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 steps in!

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 sum 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 thirty years. You’ve owned the house for five years, so you now owe $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 instead, though 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 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 will recast your mortgage and recalculate how much money you owe each month. Considering the fact that your outstanding balance has been significantly reduced, you’ll owe less principal and fewer interest payments every month, too!

Eligibility and Guidelines For a Mortgage Recast

If this sounds like something you’re interested in, keep in mind the eligibility and guidelines. Typically, a mortgage lender will have the following requirements before one could recast their mortgage.

  • Generally speaking, the mortgage lender will require the homeowner to pay down a certain dollar amount. If you have an extra $1,000, you cannot recast your mortgage. Many mortgage lenders will require at least a $10,000 payment.
  • The mortgage lender may charge a small fee, typically a few hundred dollars, to do the administration work involved with a recasting mortgage.
  • The mortgage lender will 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 home, they are not only changing the interest rate on the home, they are also changing the duration of the mortgage. For example, if you have 22 years left on your mortgage, and you refinance back into a 30-year mortgage, you will owe 30 years on your mortgage, starting from square one.

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 refinanced your loan with a lower interest 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!

  • You’ll reduce your monthly mortgage payment.
  • Your reduced monthly mortgage payment will lower your debt-to-income ratio.
  • You’ll pay less interest over the life of your loan.

Cons of Mortgage Recasting

With that being said, there are disadvantages that must also be taken into consideration, such as these:

  • You may lose the opportunity cost of investing the money elsewhere.
  • While you will have more equity in your home, you can't borrow against your home.

How To Calculate if a Recast is Right For You

Understanding how to determine whether or not a recast is right for you requires that you consider a few primary variables.

First and foremost, how much money do you plan on putting down for your mortgage recast, and how much money will a recast save you each month? If you are planning to put $25,000 down towards your recast, that would reduce your monthly mortgage payment by $50, or $600 per year. Thus, you will have effectively generated a rate of return slightly lower than two-and-a-half percent.

You may be better off taking that $25,000 and investing it elsewhere. However, if this ended up reducing your monthly mortgage payment by $150, then you’d have a rate of return slightly greater than seven percent on that $25,000 lump sum payment, which paints a far more attractive picture.

Additionally, you’ll want to consider what other opportunities a lower monthly payment provides. As mentioned, this reduces your debt to income ratio, which could help lower your interest rates on other loans you’re looking to secure.

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 is a great way to reduce your debt-to-income ratio, too.

If you ever come across a lump sum of cash that equates to $10,000 or more, and you find yourself wondering how you should invest that money, consider putting that money towards the principal balance on your home. 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.

 

Refinance Your Home Today!

All material is presented for informational and educational purposes only and should not be construed as individual financial, investment, or legal advice or instruction. ZeroMortgage does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by ZeroMortgage. ZeroMortgage, its affiliates, and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action. ZeroMortgage does not provide tax advice. Please contact your tax adviser for any tax related questions.

This page last updated: March 21, 2022