Mortgage Recasting: How It Can Save You MoneyCASAPLORERTrusted & Transparent
What You Should Know
- Recasting lets you reduce your monthly mortgage payments by making a lump-sum principal payment
- The term length and mortgage rate stays unchanged when recasting
- Lenders usually charge a recast fee or servicing fee of around $250
- Alternatives are refinancing, which lets you change your rate and access your equity, and prepayments which lets you pay off your mortgage faster
What is a Mortgage Recast?
A mortgage recast is when you make a lump-sum payment towards your mortgage in order to reduce your monthly mortgage payments. Everything else, including the mortgage interest rate and loan term length, stays the same. The only thing that changes will be your mortgage loan balance, due to your lump-sum payment, and the size of your monthly mortgage payments.
What is recasting a loan?
Recasting means to rearrange. When you are recasting a loan, you're asking your lender to rearrange your loan. More specifically, your mortgage loan will be reamortized based on your new reduced mortgage loan balance for the same loan term length. Recasting your mortgage means that your lender will recalculate a new mortgage amortization schedule with a smaller loan balance being spread out over the same time period. This results in your monthly mortgage payments being smaller.
How Mortgage Recasting Works
Mortgage recasting is also known as re-amortizing since your mortgage’s amortization schedule will be changed. In order to recast your mortgage, you’ll need to make a lump-sum payment. Your mortgage lender must approve your mortgage recasting request, and they may charge a recast fee or a servicing fee. Let’s take a look at an example of a mortgage recast to see how it works:
Example of a Mortgage Recasting
Let’s say that you have just gotten a conventional mortgage loan of $400,000, with an interest rate of 3% and a loan term length of 30 years. Your current principal balance is $400,000, and your monthly mortgage payment is $1,686. You have just received a large inheritance, and so you're looking to use $100,000 towards a mortgage recast. Let’s also assume that your lender doesn’t charge a recast fee.
- Mortgage Balance: $400,000
- Interest Rate: 3%
- Loan Term Length: 30 years
- Monthly Payment: $1,686
- Lump-Sum Payment: $100,000
By using your $100,000 inheritance money to recast your mortgage, your new mortgage loan balance is now just $300,000. Your mortgage interest rate and term length stays the same, but your monthly payment will change. How much will your monthly payment be reduced to?
Using a mortgage payment calculator, we're able to calculate that your monthly mortgage payment will now be $1,265 per month. That’s $421 less money every month that you will need to pay towards your mortgage for 30 years. By making a $100,000 lump-sum payment to recast your mortgage, you’re freeing up money and increasing your monthly cash-flow.
Reduced Monthly Payments by Mortgage Recasting
|Monthly Mortgage Payment|
|Before Mortgage Recasting||$1,686|
|After Mortgage Recasting||$1,265|
|Monthly Mortgage Payment Savings||$421|
How Mortgage Recasting Saves You Money
The main question that borrowers might have is: “will mortgage recasting save me money?” The answer to this question depends on not just your mortgage rate, but on the current mortgage rates offered by your lender and other lenders.
Based on the above example, your monthly payment will now be $1,265 per month. While the $421 difference is seen immediately as money saved every month, you will also be saving on mortgage interest costs too. Since you’re now borrowing a smaller amount, you will be paying less interest over time. Before the mortgage recasting, the total interest to be paid was $207,109. After the recasting, the total interest to be paid is just $155,332. By making a $100,000 lump-sum payment today, you will save $51,777 in interest costs over 30 years. You will also immediately build up $100,000 in home equity today as well.
Example of Savings from a Mortgage Recasting
|Total Interest Costs|
|Before Mortgage Recasting||$207,109|
|After Mortgage Recasting||$155,332|
|Monthly Mortgage Payment Savings||$51,777|
Will a mortgage recast always save me money?
If you happen to have a large sum of money available, a mortgage recast might seem like a good idea to reduce your mortgage payments. However, you should also consider alternatives to mortgage recasting to see if there are better uses for that money. You will also need to consider if a mortgage refinance can save you more money.
With a mortgage recasting, your interest rate stays the same. What happens if current mortgage rates offered by lenders are lower than your contracted mortgage rate? If you recast your mortgage, you will be unable to get a lower interest rate. In order to get a different interest rate, you will need to refinance your mortgage.
Using cash to recast your mortgage might not always make sense either. In the above example, by paying $100,000 today, you’ll save $51,777 over 30 years. That works out to about a 1.7% annual return on your mortgage recasting. If you were to use that $100,000 in other ways, such as renovating your home to increase its value, investing in stocks or bonds, or to pay off high-interest debt such as credit cards, you might see better returns or savings.
Mortgage Recasting Fee
Lenders may charge a recast fee or a servicing fee in order to process your mortgage recasting request. This fee is usually only a few hundred dollars. For example, Rocket Mortgage charges a $250 recast fee.
Mortgage Recasting vs. Mortgage Refinancing
Mortgage recasting means that your term length and interest rate stays the same. Mortgage refinancing means that you will be changing the terms of your mortgage loan, which might mean changes to your term length, interest rate, and/or mortgage balance.
If you want to access your home equity to borrow more money, you will need a cash-out refinance in order to do so. You cannot borrow more money by recasting your mortgage. Instead, a mortgage recast requires you to pay more money into your mortgage. If you want to change the interest rate of your loan, which will be the case if rates have fallen, you will also need to refinance your mortgage. Mortgage recasting doesn’t change your interest rate.
Generally, mortgage recasting is much simpler than a mortgage refinance. Your lender will most likely not need to check your credit score when you apply for a mortgage recast, while a mortgage refinance can have a hefty application process. Recast fees, generally in the range of a few hundred dollars, will also be much lower than refinancing closing costs that can stretch into the thousands of dollars.
If you just want to lower your mortgage payments, then a mortgage recast is a simple way for you to do so. If you want to make any other changes to your mortgage, then you will need to refinance your mortgage.
What Can I Change: Recasting vs. Refinancing
Should I Refinance or Recast My Mortgage?
Refinancing your mortgage can be a costly way to make a lump-sum payment, but it is also the only way to get a new mortgage rate. Let’s consider a $400,000 mortgage with an interest rate of 3% for a 15-year term. You have $100,000 in cash that you want to use to prepay your mortgage loan. You are given the option to refinance your mortgage with an interest rate of 2.5%. Should you refinance or recast your mortgage?
|Original Mortgage Balance||$400,000||$400,000|
|New Mortgage Balance||$300,000||$300,000|
|Closing Costs||- $300 Recast Fee||- $7,000 Closing Costs|
|Total Interest Costs||$72,914 at 3%||$60,066 at 2.5%|
|Total Costs (Interest + Closing Costs)||$73,214||$67,066|
If the difference in interest rates is large enough, it can make sense to refinance your mortgage in order to take advantage of the lower rate. In the above example, you’ll be paying $6,148 less by refinancing your mortgage even after considering the $7,000 in refinance closing costs. If the difference in rates is small, then a mortgage recast might be a better option.
However, current mortgage rates might not always be lower than your contracted rate. With the U.S. Federal Reserve Rate expected to rise over the coming years, it’s widely seen that mortgage rates will rise as well. If current rates are higher, you wouldn’t want to refinance at a higher interest rate. Instead, recasting lets you avoid changing your interest rate, meaning that you get to keep your low mortgage rate.
How to Request a Mortgage Recast
To request a mortgage recast, you'll need to contact your mortgage lender. You will need to have enough money to make your desired lump-sum payment, but your lender may also require a minimum lump-sum amount in order to recast your mortgage.
What Kinds of Mortgages Can Be Recast?
Not all mortgages can be recast. Conventional loans and jumbo loans are eligible to be recast, but FHA loans, VA loans, and USDA loans cannot be recast. That's because government-backed mortgage loans cannot be recast.
Mortgage Recasting Eligibility by Mortgage Type
|Eligible for Mortgage Recasting||Not Eligible for Mortgage Recasting|
|Conventional Loans||FHA Loans|
|Jumbo Loans||VA Loans|
|Conforming Loans||USDA Loans|
Mortgage Recasting vs. Mortgage Prepayments
It’s easy to confuse recasting and prepayments, since in both cases you’ll be paying down your mortgage. The difference between recasting and prepayments is that the term length stays the same with recasting, while the term length gets shorter when you make a prepayment. That’s because with a mortgage prepayment, you will be paying future mortgage payments today, which will result in you being able to pay off your mortgage faster. However, your monthly mortgage payment stays the same after making a prepayment.
What does this mean? This means that you will want to make mortgage prepayments instead of recasting if you want to pay off your mortgage faster. On the other hand, if you don’t want to pay off your mortgage loan faster but want your monthly payments to decrease, then you will want to recast your mortgage.
Recasting vs. Prepayments
|Term length stays the same||Term length gets shorter|
|Mortgage payment gets smaller||Mortgage payment stays the same|