Refinancing isn’t the only way for homeowners to lower their monthly mortgage payments—a lesser-known strategy called mortgage recasting can accomplish that goal as well. But: Mortgage recasting isn’t an option for every homeowner—it is not available with every mortgage, and it requires a hefty lump-sum payment. Bottom Line Personal asked mortgage expert Keith Gumbinger for details…
What Is Recasting a Mortgage?
The payment schedule laid out in a mortgage loan isn’t necessarily set in stone. Example: A homeowner often can “prepay” his/her mortgage by making more frequent or larger payments than required—those additional payments will result in the loan being paid off somewhat sooner than scheduled.
Alternative: The homeowner might be able to “recast” the mortgage by making a big one-time lump-sum payment to the lender. Unlike prepaying, this won’t shorten the length of the loan. Instead it will decrease the amount due each month during the loan’s existing term. Unlike refinancing, recasting doesn’t change the mortgage’s interest rate, but because that interest rate is applied to a reduced loan balance after the lump-sum payment, it does lower the total interest paid over the life of the loan.
Example: A homeowner who has $350,000 and 25 years remaining on a 6% fixed-rate mortgage makes a $50,000 lump-sum recasting payment. This lowers his monthly mortgage payment from $2,255 to $1,933 (excluding the portion of the mortgage loan that goes toward escrow, which wouldn’t change). The total interest payments he will make during the life of the loan will decline by $46,645.
How Mortgage Recasting Works
When a homeowner recasts a mortgage, the mortgage lender “reamortizes” the loan—that is, the lender repeats the mortgage-amortization process and recalculates the amount due each month. Lenders typically charge a fee of a few hundred dollars to do this.
Lenders aren’t required to recast mortgages, and even lenders that do allow mortgage recasting often set minimum prepayment amounts or impose other restrictions. VA mortgages, FHA mortgages and USDA mortgages are never eligible for recasting.
When Is Mortgage Recasting Wise?
Lowering one’s monthly mortgage payments has obvious appeal, but recasting isn’t appropriate for every homeowner, even those who have sufficient available cash. “It’s worth considering whether this is the best use of a lump-sum amount,” says Gumbinger. “If these homeowners later need the money for other purposes, they would have to pay to get it back out of the house by taking out home-equity loans.”
Two scenarios when mortgage recasting might make sense, according to Gumbinger…
When you are buying a new home before selling your current home
A homebuyer in this situation might not be able to afford to make a large downpayment on his new home. After he later sells the first home, he could use some of the proceeds of that sale to recast the new home’s mortgage.
You are currently required to pay private mortgage insurance (PMI)
Homeowners who have less than 20% equity in their homes usually are required to pay for PMI. Recasting could push their equity above 20%, ending this PMI requirement. Reminder: Rising home values have pushed many homeowners above the 20% equity mark even without mortgage recasting. If you’re currently paying PMI, ask your lender if you’re eligible to cancel it based on your current loan-to-value ratio.
