What is a Mortgage Recast?
A mortgage recast is a loan modification where the lender recalculates your mortgage payments based on your remaining loan balance and the original interest rate and loan term. It’s a way to lower your monthly payment without a full refinance, typically done after making a significant lump-sum payment toward your principal.
Understanding Mortgage Recasting
What Is a Mortgage Recast?
A mortgage recast isn’t a refinance. Instead of getting a new loan with a new interest rate or term, you keep your existing mortgage but ask your lender to adjust your payment schedule. Think of it like getting a new payment plan for the same loan.
How Does a Mortgage Recast Work?
When you make a large lump-sum payment on your mortgage (say, from an inheritance or bonus), that payment goes directly to reducing your principal balance. However, your monthly payments usually stay the same because they’re based on the original loan amount and amortization schedule.
With a recast, you ask your lender to re-amortize your loan. This means they recalculate how much you should pay each month over the remaining life of the loan, based on the new, lower principal balance. Your interest rate and the number of years you have left on the loan remain unchanged. The result is a lower monthly payment.
Real-World Example:
Let’s say you have a $200,000 mortgage with 25 years remaining, and your monthly principal and interest payment is $1,000. You receive a $30,000 inheritance and decide to make a lump-sum payment, reducing your principal to $170,000.
Without a recast, your monthly payment would likely remain $1,000. But if you opt for a recast, your lender would re-amortize the $170,000 balance over the remaining 25 years at your original interest rate. Your new monthly payment might drop to, say, $850. You’ve saved $150 per month without changing lenders or getting a new loan.
Who Benefits from a Mortgage Recast?
- Homeowners who made a large lump-sum principal payment: This is the most common scenario. If you’ve paid down a significant chunk of your mortgage, a recast can help you realize immediate savings on your monthly payments.
- Homeowners looking to lower monthly expenses: If you’re experiencing increased living costs or want more disposable income, a recast can provide some breathing room without the hassle and cost of refinancing.
- Homeowners who don’t want to change their interest rate: If you have a low interest rate on your current mortgage, a recast allows you to benefit from a lower payment while keeping that favorable rate. Refinancing might mean accepting a higher rate if market conditions have changed.
Mortgage Recast vs. Refinance:
| Feature | Mortgage Recast | Mortgage Refinance |
|---|---|---|
| Goal | Lower monthly payments | Lower rate, cash-out, change term |
| Interest Rate | Stays the same | Can change (potentially lower or higher) |
| Loan Term | Stays the same | Can change |
| Process | Loan modification, simpler, cheaper | New loan application, more complex, costly |
| Cost | Typically a small fee ($100-$300) | Closing costs ($3,000-$5,000+) |
| Credit Check | Usually not required | Required |
| Appraisal | Usually not required | May be required |
Tips for Requesting a Mortgage Recast:
- Check with Your Lender: Not all lenders offer mortgage recasting, and some may have specific requirements. Contact your mortgage servicer to see if it’s an option for you.
- Understand the Requirements: Lenders often require that your payment be applied directly to the principal and that you don’t want to change the loan term or interest rate.
- Know the Fee: There’s usually a fee associated with a recast, but it’s significantly lower than refinancing costs.
- Make the Lump-Sum Payment First: You typically need to make the large principal payment before the lender will recast the loan.
- Get it in Writing: Ensure you receive confirmation from your lender detailing the new monthly payment amount and that the loan has been officially recast.
Common Misconceptions:
- “A recast lowers my total interest paid.” While a recast lowers your monthly payment, it doesn’t necessarily reduce the total interest you’ll pay over the life of the loan if you only focus on the lower payment. If you continue paying the original higher amount, you’ll pay less interest overall and pay off the loan faster. The benefit of a recast is the flexibility of a lower payment.
- “It’s the same as refinancing.” As detailed above, it’s a much simpler and cheaper process than refinancing.