If you’ve recently come into a lump sum of money—perhaps from a bonus, inheritance, or sale of an asset—you might be thinking about ways to reduce your mortgage burden. While refinancing is one option, a lesser-known strategy is mortgage recasting. Recasting can lower your monthly payments without the costs and complexities of refinancing. Here’s what you need to know about mortgage recasting and when it makes sense.
What Is Mortgage Recasting?
Mortgage recasting, also known as re-amortization, is when you make a large lump-sum payment toward your mortgage principal, and your lender adjusts your monthly payments based on the new lower balance. Unlike refinancing, you don’t change the terms of your loan, like the interest rate or the length of the mortgage. Instead, your lender recalculates your monthly payments based on the reduced principal balance.
How Does Mortgage Recasting Work?
Here’s a step-by-step breakdown of the process:
- Make a Lump-Sum Payment: You make a one-time, large payment toward your mortgage principal. The amount can vary, but most lenders require at least $5,000 to $10,000 to be eligible for recasting.
- Lender Re-Amortizes Your Loan: After receiving your lump sum, the lender recalculates your loan payments based on the new balance. This reduces your monthly payment while keeping your interest rate and loan term the same.
- Pay a Recasting Fee: Typically, there’s a fee for mortgage recasting, usually between $100 and $500, depending on your lender. However, this is much less expensive than the closing costs associated with refinancing.
When Does Mortgage Recasting Make Sense?
While recasting can be a great tool for some, it’s not for everyone. Here are some scenarios when it might make sense to recast your mortgage:
- You’ve Come Into a Large Sum of Money
If you’ve received a financial windfall—whether from a bonus, inheritance, or the sale of a property—mortgage recasting can be an effective way to reduce your monthly payments. By applying the lump sum to your mortgage balance, you’ll lower the amount of interest you pay over the life of the loan.
Why this makes sense:
- You keep your current interest rate and loan terms while benefiting from reduced monthly payments.
- You can apply your extra funds directly to reduce debt without the hassle of refinancing.
- You’re Happy With Your Current Interest Rate
One major advantage of recasting is that it keeps your current interest rate intact. If you locked in a favorable interest rate when you bought your home, refinancing might not make sense, especially if current rates are higher. Recasting allows you to benefit from a lower principal without altering the terms of your loan.
Why this makes sense:
- No risk of losing your low interest rate.
- Your monthly payments decrease without resetting the loan term.
- You Want Lower Monthly Payments but Don’t Want to Reset Your Loan Term
Refinancing typically resets the clock on your mortgage, starting a new 15- or 30-year term, even if you’ve already paid down a portion of your existing loan. If you don’t want to extend the length of your mortgage but still want to reduce your monthly payments, recasting can help you achieve this goal.
Why this makes sense:
- You continue to build equity and progress toward paying off your loan without extending the term.
- Lower payments give you more flexibility in your monthly budget.
- You Want to Avoid the Costs and Hassle of Refinancing
Refinancing often involves closing costs, a new appraisal, and the administrative burden of applying for a new loan. Recasting, on the other hand, involves a much smaller fee, typically ranging from $100 to $500, and no credit check or application process.
Why this makes sense:
- The fee for recasting is significantly lower than the typical costs of refinancing, which can run into thousands of dollars.
- It’s a straightforward process that doesn’t require a new loan approval or extensive paperwork.
When Mortgage Recasting May Not Be the Best Option
While recasting can be a smart move for many homeowners, it’s not always the best choice. Here are a few scenarios where it may not make sense:
- You Want to Lower Your Interest Rate
If current mortgage rates are significantly lower than your existing rate, refinancing would allow you to reduce both your monthly payments and the amount of interest you pay over the life of the loan. Recasting doesn’t change your interest rate, so if rates have dropped, refinancing might be a better option.
- You Need Access to Your Cash
If the lump sum of money you have could be better used for other financial goals, such as building an emergency fund or investing for growth, locking it into your mortgage may not be the best idea. Once you use that money to recast your mortgage, it’s no longer liquid and accessible.
- Your Lender Doesn’t Offer Recasting
Not all lenders offer mortgage recasting as an option, and some loans, such as FHA or VA loans, are not eligible for recasting. Check with your lender to see if this option is available before making a decision.
Final Thoughts
Mortgage recasting can be a cost-effective way to reduce your monthly payments while keeping your current interest rate and loan terms. It’s a simple process that can offer significant benefits if you have a lump sum of money to apply to your mortgage principal. However, it’s important to weigh your long-term financial goals and ensure that using your funds to reduce your mortgage aligns with your overall strategy. Before making a decision, consider consulting with a financial advisor or mortgage professional to determine if recasting is right for you.