Mortgage recasting is a powerful tool for homeowners looking to reduce their interest costs and pay off their home loans faster. However, it’s an option that often goes overlooked or misunderstood.
In this post, we’ll break down exactly what mortgage recasting is, the pros and cons to consider, and specific scenarios where it makes the most sense.
If you read till the end, you’ll have a clear understanding of whether or not recasting your existing mortgage is the right financial move for your situation.
Let’s get started!
What Is Mortgage Recasting?
Mortgage recasting is simply reamortizing your existing home loan. This means recalculating the remaining payments to lower your monthly mortgage amounts and interest costs over the entire life of the loan.
Specifically, when you recast your mortgage:
1. You make a lump sum payment – This could be from savings, equity in your home, or other assets. The minimum amount required is typically 10-20% of your current loan balance.
2. Your lender recalculates your payments – Based on the size of your lump sum payment and the years remaining on your loan, they’ll generate a new monthly payment amount and amortization schedule.
3. Your interest savings kick in immediately – Since you’ve effectively paid down more of your principal balance upfront, a lower portion of each new payment now goes towards interest instead of principal.
In essence, recasting gives you the opportunity to “start over” on your mortgage at a lower monthly cost while still keeping your original low interest rate locked in.
This freedom to recalibrate can provide significant long-term interest savings if done strategically.
Key Pros and Benefits of Mortgage Recasting
Now that we understand the mechanics, let’s look at some of the top advantages mortgage recasting offers homeowners:
Lower Monthly Payments
By definition, recasting reduces your required monthly mortgage installments. For many people, even a monthly savings of a few hundred dollars can meaningfully improve their household cash flow and budgeting. Lower payments also make it easier to pay extra towards principal each month.
Shortened Loan Term
The lower balances from upfront lump sum payments allow you to pay off your mortgage years sooner compared to sticking with your original amortization schedule. This gets you to the light at the end of the tunnel of homeownership much faster.
Interest Cost Savings
As mentioned, recasting means more of each payment now immediately slashes at your principal rather than padding interest for the lender. Over the lifetime of the loan, these interest savings can add up to tens of thousands of dollars recouped back to you, the homeowner.
Flexibility to Refinance Upside Down
Recasting provides an alternative for those who may be underwater on their current mortgage but want to take advantage of today’s low rates. It lets you recoup equity without having to meet stringent refinance loan-to-value requirements.
Weighing the Potential Drawbacks
Of course, as with any financial decision, mortgage recasting is not without potential downsides either:
Closing Costs
While lenders won’t charge new origination fees, there is usually a $500-$1,000 administrative fee to process the loan recasting. For some, this upfront cost may negate shorter-term interest savings.
Less Liquidity
Using cash for the lump sum payment reduces flexibility and emergency reserves. Make sure recasting leaves enough liquid assets for other savings goals or unexpected expenses.
May Impact Prepayment Penalty
Some loans have prepayment penalties if too much principal is paid off too quickly. Check loan documents or confirm with your lender if this could be a factor.
Rates May Be Lower in Future
If interest rates drop substantially in the coming years, it may have been better to refinance for an even lower long-term rate rather than recast at today’s level. Of course, this is impossible to predict.
No Cash Out Refinancing
Recasting keeps you in the same loan, whereas refinancing could provide cash to pay off higher-interest debt or fund home improvements, etc. You lose that flexibility.
Weighing these pros and cons will help you determine if recasting is right for your specific financial situation compared to alternatives like continuing extra payments or refinancing. Now let’s dive into some common scenarios.
When Mortgage Recasting Makes the Most Sense
Not every homeowner is a candidate for recasting, but it’s an option that particularly excels in a few key circumstances:
#1 – You Have Significant Home Equity
If you’ve built up 20% or more home value compared to your purchase price, recasting leverages that equity to reduce costs going forward. The larger lump sum payment means more substantial monthly savings.
#2 – Your Interest Rate Is Above Current Market
If you purchased years ago when rates were higher and have a mortgage over 4%, recasting at today’s sub-4% environment provides immediate and lasting savings relative to refinancing.
#3 – You Plan to Stay Long-Term in Your Home
Recasting makes the most financial sense when you intend to remain in the home for at least 5-7 more years. This allows ample time for interest savings to outweigh upfront costs compared to alternatives like continuing extra payments.
#4 – Your Payment-to-Income Ratio Is High
Do you feel house poor or have difficulty making ends meet each month due to a large mortgage payment? Recasting lowers obligations and frees up cash flow, improving financial flexibility and security.
#5 – You Have Significant Liquid Assets to Invest
If recasting uses little to none of your emergency fund or cash reserves, the lower interest costs of recalibrating can make for a smart investment of excess savings collecting dust in low-yield accounts.
At the end of the day, only you know your individual goals, risk tolerance, and financial situation best. But analyzing factors like the above can help indicate if recasting deserves serious consideration, or if alternatives are a better fit instead.
Calculating the Real Cost Savings of Recasting
To really understand if recasting pencils out financially for your needs, it’s important to crunch some actual numbers. Let’s walk through a hypothetical example:
- Original Loan: $250,000 at 4.25% interest for 30 years
- Current Balance: $200,000
- Lump Sum Payment: $40,000 (20% of balance)
- Admin Fee: $750
- New Payment: Recalculated at $1,200/month over remaining 22 years
Using an online mortgage calculator, we find:
- Original Payment: $1,350/month
- Original Interest Paid: $147,000
- New Payment: $1,200/month
- New Interest Paid: $118,000
So in this case, by recasting we save:
- $150/month in lower payments
- $29,000 in total interest costs
- Payoff in 22 years vs original 30
Including the admin fee, break-even on costs occurs around 3 years in. From that point onward, it’s all savings – a clear win for this homeowner to recast.
Modeling your specific numbers will reveal if it offers a similarly attractive value proposition given your rates, equity, goals, and time horizon for ownership.
Be sure to consider all factors too, like opportunity costs or risks of less liquidity.
Alternative Strategies to Consider
While recasting can certainly pay off when it makes sense, it’s not always the only or even best option available. Two alternatives worth reviewing for your situation:
Continued Extra Payments
Rather than a one-time lump sum, simply paying an extra $150-500 per month towards principal goes a long way over time too by cutting interest costs significantly. No fees involved, and your cash remains more liquid for other needs.
Refinancing
If rates have dropped 1% or more since your original mortgage, refinancing likely offers even lower monthly payments versus recasting at your higher starting rate. Just make sure loan fees aren’t too onerous given your expected ownership duration.
Run the numbers on continued extra payments, current refinance rates, as well as recasting to truly optimize your homeownership plan. Sometimes a hybrid approach combining tactics works best too. Get rate quotes from multiple lenders to get the most competitive offers.
Final Thoughts on Mortgage Recasting
Used properly, mortgage recasting empowers homeowners to proactively reduce interest costs and expedite payoff of their largest liability – the family home.
While not ideal in every situation, for those able to leverage built-up equity at above-market interest rates while committing long-term ownership, recasting clearly wins from a dollars-and-cents perspective.
Just be sure to thoughtfully consider your goals, resources, and alternatives before pulling the trigger. With the right planning and analysis, recasting could unlock thousands in savings to put back in your pocket.