Is It Time To Recast Your Mortgage?

When most mortgage borrowers think about reducing their home loan payments, they believe that their only alternative is to refinance their mortgage and get a completely new loan. Fortunately, there is another way to save money known as mortgage recasting.

It's a method of reworking a mortgage that results in a lower payment, but most people aren't familiar with it. Here's how mortgage recasting works.

A mortgage recast is when the homeowner makes a large lump-sum payment that reduces the loan principal balance of their mortgage. The lender then recalculates a new monthly payment based on the reduced loan balance and lowers the monthly payments. As a result, you’ll pay less interest over the life of the loan.

The interest rate and term of the original mortgage do not change.

Not all mortgages can be recast. For example, Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans are not eligible for recasting, but loans purchased by Fannie Mae and Freddie Mac are eligible.

The first step is to contact your mortgage lender and find out if they offer mortgage recasting service. Most lenders do, but not all. Typically, you have to pay a fee, which varies by lender and usually only amounts to a few hundred dollars. Recasting keeps the same interest rate, and the number of monthly payments left on your mortgage remains the same.

Recasting your mortgage will free up some cash on a monthly basis that you can use to pay down other debt, invest in your stock portfolio or add to your retirement plan. Ideally, the investment you make with your excess cash will have a higher rate of return than the rate on your mortgage.

Refinancing may not be an option because of a change in your credit score or income that may keep you from qualifying for a new loan.

Recasting a mortgage is a less expensive way to lower your mortgage payments rather than paying higher fees to refinance.

Let’s say you have a 30-year mortgage that had an original balance of ​$250,000​ at a ​4 percent​ interest rate and has been paid down to ​$200,000​. The monthly payment is ​$1,193.54.​

Suppose you’ve received an inheritance, and you’re thinking about paying ​$20,000​ to recast your mortgage. You don’t want to refinance because you already have a low interest rate, and it doesn't make sense to pay ​2 percent to 6 percent​ in closing costs with very little gain.

Using an online recast mortgage calculator reveals that a ​$20,000​ lump sum payment on the mortgage balance will reduce the monthly payment to ​$1,073. 41​. This is a difference of ​$120.13​ per month (​$1,193.54 minus $1,073.41)​ or ​$1,441.56​ each year (​$120.13 times 12​).

So one way to look at this transaction is that by paying down the mortgage by ​$20,000​, you get a return or savings of ​$1,441.56​, which is a ​7.2 percent​ return on the investment (​$1,441.56 divided by $20,000​). You would realize the savings each year until the mortgage is paid off.

Your decision would be whether you could use the ​$20,000​ on another investment that might have a higher return or paying down higher-interest debts, like credit cards, that would give you more savings with lower interest charges..

These are typical situations where it could make sense to recast a mortgage rather than refinancing.

• You have extra cash on hand and don't anticipate any major bills coming any time soon. Maybe you've received a cash gift or an inheritance.
• Recasting makes sense when you want to reduce your monthly mortgage payments.
• If circumstances have changed and you can't qualify for a new refinancing loan, preventing you from taking advantage of lower interest rates.
• You've purchased a new home before selling your old home. In this case, you could use the proceeds of the equity from the sale of your old home to recast your new mortgage and get a new amortization schedule.
• If you anticipate needing your cash to cover an expected major expense, tying your money up in a mortgage and increasing the equity in your house wouldn't be a good idea. In that case, you'll probably want to consider a cash-out refinance.
• If you're getting close to retirement, you may want to recast your mortgage to reduce your payment.

These are the factors to consider for a mortgage recast.

• Lenders typically require a lump sum payment of at least ​$5,000​ to recast a mortgage.
• Most conventional loans and jumbo loans are eligible for recasting.
• No credit check is required. But if your credit score has improved, you might qualify for a new refinance mortgage at a lower interest rate.
• If current interest rates are lower than the rate you have on your current mortgage loan, it may make more sense to refinance your mortgage and pay the fees to take advantage of the lower interest rate.

These are the pros and cons.

• Recasting costs less than refinancing.
• You don’t have to qualify for a new loan.
• A new appraisal isn’t required.
• You don't need a high credit score to qualify.
• You get to keep your current interest rate, even if it's already low.
• If recasting gets your loan-to-value ratio below 80 percent, you should be able to cancel the private mortgage insurance premium, which adds to your savings.
• You'll save on total interest paid and lower your monthly payment.
• The lower monthly payments will lower your debt-to-income ratio and improve your eligibility for other loans.

• Not all mortgages qualify for a recast.
• Your existing mortgage lender may not allow it.
• You must meet the minimum cash requirement, usually $5,000.
• Recasting doesn’t shorten the term of your mortgage.
• Can’t lower your interest rate.
• You'll have more of your cash tied up in home equity and reduced liquidity.
• A lower monthly payment means you'll have a lower deduction for mortgage interest on your tax return.

Recasting your mortgage make sense if you:

• have a large sum of money that you can use to pay down the principal.
• already have a low interest rate on your current mortgage that you’d like to keep.
• can't qualify for a mortgage refinance.

Refinancing your mortgage would be better if you:

• don't have enough extra cash available to apply to the principal.
• will be able to get a lower rate by refinancing
• want to shorten your mortgage loan term from 30 years to 15 years.
• want to take cash out of your home equity.