Many homeowners assume that the only way to reduce their monthly mortgage payment is to refinance.
That is not always true.
A mortgage recast, sometimes called a loan re-amortization, may allow a borrower to make a substantial principal payment and then have the lender recalculate the remaining monthly payments based on the lower loan balance.
The interest rate generally stays the same.
The remaining loan term generally stays the same.
But the required monthly principal-and-interest payment can decrease.
At Capital Funding Mortgage, we believe homeowners should understand all of the options available before automatically refinancing an existing mortgage.
I’m John Madden, owner of Capital Funding Mortgage, and I have been helping borrowers with mortgage financing for more than 25 years.
A mortgage recast can be particularly useful for homeowners who have a good existing interest rate but want to reduce their monthly payment after paying down a meaningful portion of the loan.
A mortgage recast is a process in which you make a significant payment toward the principal balance of your mortgage and the loan servicer recalculates your required monthly payment.
The lender or servicer essentially takes:
and creates a new amortization schedule.
Your mortgage is not replaced with a new loan.
That is the major difference between a recast and a refinance.
Suppose you originally borrowed:
$500,000
After several years, your mortgage balance is:
$450,000
You then receive proceeds from selling another property, an inheritance, bonus, investment sale, or other source and decide to put:
$150,000 toward the mortgage principal.
Your new balance becomes approximately:
$300,000
If your lender allows recasting, the remaining monthly payments can then be recalculated based upon the $300,000 balance, your existing interest rate, and your remaining loan term.
The result can be a significantly lower required monthly payment.
This is often the most important advantage of a recast.
Suppose you obtained your mortgage several years ago at a very attractive fixed rate.
If current mortgage rates are substantially higher, refinancing simply to obtain a lower payment may not make sense.
With a recast, you may be able to:
That can be particularly valuable when your current mortgage rate is better than what is available in today’s market.
A mortgage recast and a mortgage refinance accomplish different things.
With a recast:
With a refinance:
Which option makes more sense depends upon your current mortgage and your goals.
A recast may be especially attractive when:
For the right homeowner, recasting can be a simple and efficient way to reduce monthly obligations.
One of the best uses of a mortgage recast involves a homeowner who buys a new home before selling the old one.
For example, you may purchase a new home with a relatively large mortgage because the equity from your existing home is not yet available.
After your old home sells, you receive a substantial amount of cash.
You could then apply those proceeds to the new mortgage and request a recast.
This allows you to:
This can be an excellent strategy when available through the lender.
Suppose you buy a new home for:
$800,000
You initially put down $160,000 and obtain a:
$640,000 mortgage
Several months later, your previous home sells and you receive:
$250,000 in net proceeds
You apply the $250,000 toward your new mortgage.
Your balance falls substantially.
If your servicer permits a recast, your monthly payment can then be recalculated using the lower remaining principal balance.
You keep your original mortgage rate while reducing the monthly payment.
This is important.
When you make a large principal payment without recasting, the required payment normally stays the same.
Because you owe less principal, more of each future payment effectively accelerates payoff, and you may pay the loan off earlier.
When you recast, however, the lender generally recalculates the payment across the remaining original term.
The required payment goes down instead.
So you are exchanging some of the accelerated payoff benefit for improved monthly cash flow.
Yes, assuming your mortgage permits normal principal prepayments.
A recast lowers the amount you are required to pay each month.
That does not mean you have to make only the new minimum payment.
You can generally continue making additional principal payments.
This can provide valuable flexibility.
For example:
Your recast payment might fall from:
$3,800 per month
to:
$2,700 per month
You now have the flexibility to pay $2,700 when you want the lower obligation but continue paying $3,800 or more when cash flow allows.
That can create both security and flexibility.
Suppose you make a $100,000 principal payment but do not recast the loan.
Your required monthly principal-and-interest payment normally remains unchanged.
However:
If you make the same $100,000 principal payment and recast, your required monthly payment is reduced.
Therefore, the decision comes down to your goal.
If you want to pay the mortgage off faster, you may prefer not to recast.
If you want to lower your required monthly payment, a recast may be more attractive.
The large principal payment itself can save a substantial amount of interest because you are reducing the balance on which future interest is calculated.
However, the recast itself is primarily a payment-recalculation mechanism.
If you recast and then make only the new lower payment, you will generally pay the mortgage according to the remaining original schedule.
If instead you make a large principal payment and continue making the old higher payment, you may pay off the mortgage sooner and save even more interest.
This is why homeowners should think about both:
monthly cash-flow goals
and
total interest cost.
Usually, a recast does not require the same full mortgage process as a refinance.
Depending upon the servicer, you may not need:
Requirements vary by lender and servicer.
That simplicity is one reason recasting can be less expensive than refinancing.
Many servicers charge a relatively modest administrative fee to recast a mortgage.
The amount varies.
This fee is generally much smaller than the closing costs associated with refinancing.
You should contact your loan servicer to ask:
There is no universal minimum.
Some servicers require a minimum dollar amount.
Others may require the borrower to reduce the principal by a certain percentage.
For example, a lender might require a significant lump-sum principal payment before it will process a recast.
The requirements are specific to the mortgage servicer.
Not every mortgage can be recast.
Conventional mortgages are among the loans most commonly associated with recasting.
Certain government-backed loans may not be eligible in the same way.
Servicer policies also vary.
Before planning around a recast, verify that your particular loan allows it.
Government-backed mortgages generally have different servicing and modification rules than conventional loans.
Do not assume that an FHA or VA mortgage can be recast simply because a conventional mortgage may permit it.
You should contact the servicer and verify the options available for your specific loan.
A recast is not always the best solution.
You may prefer refinancing if:
You may also prefer simply making the principal payment without recasting if your priority is paying the mortgage off as quickly as possible.
Suppose you have a 30-year mortgage and receive a large amount of cash.
You might consider:
Pay down the existing mortgage and recast it.
Pay down the balance and refinance into a 15-year mortgage.
The recast may provide:
The 15-year refinance may provide:
The better option depends upon your interest rate, remaining term, monthly budget, closing costs, and long-term goals.
A homeowner approaching retirement may have accumulated substantial savings but want to reduce monthly fixed expenses.
For example, someone may receive:
Applying part of those funds to the mortgage and recasting could substantially reduce the required monthly payment without giving up an attractive existing mortgage rate.
That can make retirement cash flow easier to manage.
Before applying a large amount of cash to your mortgage, consider what else that money could be used for.
Potential considerations include:
Reducing a mortgage balance may be valuable, but once cash is placed into home equity it is generally less liquid.
Capital Funding Mortgage does not provide investment or tax advice, so borrowers may want to discuss the broader financial consequences with their financial advisor or tax professional.
If you are considering a mortgage recast, contact your servicer and ask:
Getting these answers in advance can help you determine whether recasting fits your goals.
Homeowners with extra cash may have three very different choices:
Best suited for someone focused on reducing the balance and potentially paying the mortgage off sooner.
Best suited for someone who wants to preserve the current loan and rate while lowering the required monthly payment.
Best suited when obtaining a new rate, changing the term, changing the loan structure, or accessing equity creates enough benefit to justify a new mortgage.
There is no single correct answer.
The numbers should determine the strategy.
If you are considering making a significant principal payment on your mortgage, it may be worth comparing a recast with refinancing and simply continuing to make extra principal payments.
At Capital Funding Mortgage, we can help you understand how the alternatives affect:
Contact John Madden at Capital Funding Mortgage to discuss whether refinancing or another mortgage strategy makes sense compared with keeping and recasting your existing loan.
With more than 25 years of mortgage experience, my goal is to help homeowners understand the long-term effect of the mortgage decision—not simply focus on the next monthly payment.
Capital Funding Mortgage
Keep your rate. Reduce your balance. Lower your required payment.
