How and When to Make a Mortgage Recast - SmartAsset

When homeowners seek to reduce their monthly mortgage payments, they generally focus on refinancing their homes. The problem with this approach is that it resets the clock on your mortgage and can stretch out your payments over a longer period of time. While you save monthly, it can cost you more in the long run. A different approach is to make a lump-sum payment and recast your mortgage based on the lower balance. Understanding the advantages and possible disadvantages of a mortgage recast can equip you to decide if this is a good move for you.

Considering a mortgage recast? Consult a financial advisor to make sure it’s accounted for in your long-term financial plan.

What Is a Mortgage Recast?

A mortgage recast is when your lender recalculates your remaining monthly payments based on the outstanding balance and remaining term. Many borrowers ask their banks to recast their mortgage after they’ve made a large lump sum payment to reduce their balance. Alternatively, some borrowers request a recast after they’ve made numerous small payments that add up to a large reduction in their balance ahead of schedule.

Recasting a mortgage is different than a refinance. With a refinance, your current mortgage is replaced with a new mortgage at the prevailing interest rates. Additionally, your mortgage term is reset to the new duration that you’ve chosen (e.g.: 10 years, 15, years or 30 years).

How Does Mortgage Recasting Work?

First of all, not all banks allow their customers to recast their mortgages. Before going too far down the process, speak with your lender first to determine if this is an available option. If your lender does allow borrowers to recast their mortgages then proceed.

To be eligible for a mortgage recast, you must reduce your balance by a meaningful amount. In many cases, lenders require that you’re at least $5,000 ahead of schedule in reducing your balance. You can make these extra payments as a lump sum or in smaller amounts over a period of time. For example, many homeowners pay extra on their mortgage every month to accelerate their mortgage payoff.

Contact your lender and ask to recast your mortgage. They’ll typically send you a form to complete to acknowledge your request. Take note that mortgage recasting does not require a credit check, traditional underwriting or costly fees. However, your bank may charge a nominal fee for processing the paperwork.

Although recasting does not reduce your interest rate, you will pay less interest over the life of the loan because of the reduction in mortgage balance. Receive your new payment schedule from the bank and continue making your mortgage payments as required. Although your monthly payments have decreased, your mortgage will be paid off on schedule based on the original loan term.

How Can a Mortgage Recast Save You Money?

By recasting your mortgage, you reduce your monthly mortgage payment. This frees up cash on a monthly basis that you can use to pay off other debt, save in your retirement plan, invest in your brokerage account or cover your expenses. Ideally, you take the monthly savings and apply it towards something that offers a higher rate of return than your mortgage interest rate. This can accelerate your path to financial independence or bolster your retirement accounts.

Some homeowners set the money aside in a college savings plan for their children or grandchildren.

Pros and Cons of Recasting Your Mortgage

Before deciding whether a mortgage recast is appropriate for your situation, it helps to list the pros and cons of this strategy. Among the advantages of this move are its simplicity and low cost.

No credit check is required: With a refinance, the bank checks your credit and underwrites a new mortgage based on your current income and financial obligations.
No appraisal is required: Lenders do not require an appraisal when recasting your mortgage.
Keeps your current interest rate: For borrowers who locked in a low interest rate before rates increased, recasting ensures that they won’t lose that attractive rate.
You don’t extend the term of your mortgage: When refinancing, your mortgage term resets. However, a recast amortized your balance over the remaining term of your current mortgage.
No lengthy application process: Refinancing can take 30 days or more and requires a lot of paperwork. With a mortgage recast, the process is much quicker since the lender isn’t underwriting a new loan.
No closing costs: Getting a new mortgage can include expensive closing costs, which often dilutes the savings from the lower interest rate. Aside from a small fee (usually around $250 to $500), there are no additional costs to recast a mortgage.

The disadvantages of a mortgage recast entail various opportunity costs and limits on availability.

You cannot lower your interest rate: If current rates are lower than your existing mortgage rate, you cannot lower the rate through a mortgage recast.
Cannot withdraw equity from your home: A mortgage recast uses your existing balance and doesn’t allow you to pull any equity from your home like a cash-out refinance does.
Not all loans are eligible for a mortgage recast: Many lenders do not offer them at all and, for those who do, some loans are not eligible. For example, FHA, VA and USDA loans may not be recast.
Restrictions on eligibility: Some lenders place restrictions on mortgage recasts based on how much you owe, how much you’ve reduced your balance and if you’ve made your payments on time.
More money tied up in equity: By paying extra to reduce your mortgage balance, you have more money tied up in your home. The only way to access this equity is to sell the home or take out a new loan (cash-out refinance, home equity loan or home equity line of credit).

Is a Mortgage Recast Right for You?

A mortgage recast is a good idea if you’ve paid down your mortgage balance quickly and prefer to have lower monthly payments. Lower payments reduce your debt-to-income ratio, which can make it easier to qualify for other loans and frees up cash on a monthly basis.

This strategy is also popular among homeowners who purchased a new home but have yet to sell the previous home. The recast mortgage on the old home can make it easier to juggle two mortgages until one is sold or enables them to convert the home into a cash-flowing rental property.

Bottom Line

A mortgage recast is an attractive strategy for homeowners who are ahead on their payments. It enables them to reduce their monthly payments based on a smaller loan amount without changing their interest rate, lengthening the term of their mortgage or paying expensive refinance fees. The process is quick, easy and only requires a small administration fee. In the end, taking advantage of this financial move could put your finances in better shape down the road.

Tips on Mortgages

Figuring out where to apply the savings from a mortgage recast for maximum benefit can be a challenge. A financial advisor can walk you through various scenarios to help you decide how to allocate the extra money. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Your mortgage debt can play a significant role in the way you plan retirement. That’s why one of your most useful tools is a free mortgage calculator.
When you save money with a mortgage recast, you can invest this money in your brokerage or retirement accounts. You can see the impact of these additional savings on your portfolio’s growth through our investment calculator.