Mortgage recasting is a powerful financial tool that can help borrowers reduce their monthly mortgage payments. While not all mortgage loan servicers allow for recasting, the majority of conventional mortgages offer this option. Furthermore, unlike purchasing a home or refinancing, the recasting process is typically inexpensive and very easy.
What is recasting?
Recasting is recalculating your mortgage loan payment based on a new outstanding principal balance. This recalculation occurs when you pay down your current principal balance with a one-time lump sum payment. The interest rate and your loan term will both remain the same but your monthly payment will decrease due to the reduced loan balance.
In order to recast you must request this from your loan servicer rather than just going into your portal and making a one-time lump sum payment on your own. The loan servicer will verify you are eligible to recast and charge a small fee for this service should you proceed. Occasionally lenders will allow you to recast if you have paid down a sufficient amount of your principal ahead of schedule rather than having to make a large lump sum payment
When would someone recast their loan?
A good time to recast could be when you receive a windfall of funds such as receiving an inheritance or selling a property. Reasons to recast can include:
- Wanting to free up monthly cash flow
- Help you qualify for an additional loan
- Put your money to work without the need to invest
An example of recasting
Let’s say you have a 30-year fixed loan at 6.99% for $500,000. Your monthly principal and interest payment is $3,323.16.
Six months later, you receive $50,000. You decide to use these proceeds to pay down your loan balance down to $450,000 and request a loan recasting. The loan servicer will recalculate your payment using your interest rate of 6.99% but then use 354 months for the term 360 months – 6 months).
Notice how your interest rate and your loan maturity date stay the same. As a result, your new payment is now $3,005.87. (Please note that this does not account for the principal payments in the first 6 months for the sake of simplicity.)
Should I Refinance or Recast?
It depends – There are a few things to consider first:
- Do you have a large lump sum to pay down your principal? If the answer is no, recasting may not be an option. Refinancing could be a better option to lower your payment.
- Can you get a lower interest rate than what you currently have? If the answer is yes, refinancing may be a better option and could lower your payment further than recasting.
- Do you want to pay off your loan early? If the answer is yes, then you may not want to recast or refinance.
If you have questions about whether recasting or refinancing is right for you, give us a call at (760)930-0569. Our Mortgage Loan Originators would be happy to answer your questions.