Understanding Mortgage Recasting: What Homeowners Need to Know

[Desiree Rejeili]

When it comes to managing your mortgage, most homeowners are familiar with refinancing as a way to lower monthly payments or take advantage of better interest rates. But there’s another option that’s often overlooked: mortgage recasting. This lesser-known strategy could help you save money and reduce your monthly payments without the hassle and cost of refinancing. Here, we’ll break down what mortgage recasting is, how it works, and who can benefit from it.

What Is Mortgage Recasting?

Mortgage recasting, also known as re-amortization, is a process that allows homeowners to lower their monthly mortgage payments by applying a lump sum toward their principal balance. Unlike refinancing, which involves taking out a new loan, recasting keeps your existing loan terms—including your interest rate and loan duration—intact. By reducing the principal balance, your lender recalculates your monthly payment based on the new, lower balance.

How Does Mortgage Recasting Work?

1. Eligibility: Not all loans are eligible for recasting. Typically, conventional loans backed by Fannie Mae or Freddie Mac are eligible, while government-backed loans like FHA or VA loans often are not. It's also important to check with your lender to see if they offer this option.

2. Lump Sum Payment: You’ll need to make a significant lump sum payment toward your mortgage principal. The exact amount varies by lender but is usually around $5,000 or more.

3. Recalculation: After you make the lump sum payment, your lender will recalculate your monthly payments based on the reduced principal balance. The interest rate and loan term remain unchanged.

4. Fees: Most lenders charge a fee for recasting, typically ranging from $100 to $500. This is much lower than the costs associated with refinancing.

Benefits of Mortgage Recasting

• Lower Monthly Payments: The most immediate benefit is a reduced monthly payment, which can free up cash for other financial goals.

• Save on Interest: By reducing your principal balance, you’ll pay less interest over the life of the loan, potentially saving thousands of dollars.

• No Credit Check or Appraisal: Unlike refinancing, recasting doesn’t require a credit check, income verification, or home appraisal, making it a quicker and simpler process.

• Keep Your Current Interest Rate: If you have a favorable interest rate on your current loan, recasting allows you to maintain it while still lowering your payments.

Drawbacks of Mortgage Recasting

• Requires a Lump Sum: Not everyone has the cash on hand to make a significant lump sum payment, which can make recasting inaccessible for some homeowners.

• Doesn’t Shorten Loan Term: While your monthly payments are lower, recasting doesn’t reduce the length of your loan. If paying off your mortgage early is a priority, recasting might not be the best option.

• Not Available for All Loans: As mentioned earlier, government-backed loans are generally ineligible for recasting, and not all lenders offer this option.

Who Should Consider Mortgage Recasting?

Mortgage recasting is a great option for homeowners who:

• Have received a windfall, such as a bonus, inheritance, or proceeds from selling another property.
• Want to lower their monthly payments without extending their loan term or going through the hassle of refinancing.
• Are satisfied with their current interest rate and loan terms.

How to Get Started

If you’re considering mortgage recasting, here are the steps to take:

1. Contact Your Lender: Ask if they offer mortgage recasting and confirm your loan’s eligibility.
2. Determine the Lump Sum Amount: Decide how much you can afford to put toward your principal.
3. Calculate Potential Savings: Use an online mortgage calculator or consult with your lender to estimate your new monthly payment and total savings.
4. Submit the Request: Once you’ve made the lump sum payment, your lender will process the recasting and provide a new payment schedule.

Final Thoughts

Mortgage recasting can be a powerful tool for homeowners looking to reduce their monthly payments and save on interest without the cost and complexity of refinancing. However, it’s not the right choice for everyone. Be sure to weigh the pros and cons, and consult with your lender or financial advisor to determine if recasting aligns with your financial goals. If you have the cash to make a lump sum payment and are happy with your current loan terms, recasting could be a smart move to improve your financial flexibility.