If you’re trying to reduce your housing payments right now, there aren’t many options. It’s hard to move because housing prices are so high, and it doesn’t make sense to refinance because mortgage rates are above 7%.
However, you aren’t totally stuck. You could try mortgage recasting, which can be easier and more affordable than refinancing. The catch is that you’ll need a chunk of money to get started.
What is a mortgage recast?
Lenders often refer to a mortgage recast with different names, such as a mortgage reamortization or a principal reduction modification. No matter what it’s called, the process is the same: You make a large payment that goes toward the principal (the original sum of money you borrowed), and then the lender reamortizes the loan to determine new (lower) monthly payments. The interest rate and terms of your mortgage don’t change.
How does a mortgage recast work?
When you recast your mortgage, you’ll pay a large chunk of money toward your principal and request a reamortization of your loan. For some people, this could be an option after receiving an inheritance or coming into a large sum of money.
Reamortizing involves recalculating your monthly mortgage payments based on your new balance, but a recast is not automatic. You’ll likely need to submit an official request to your mortgage servicer to initiate the process. Since you aren’t changing the rate or terms of your loan, you won’t need to complete much additional documentation or go through a credit check.
A recast doesn’t happen overnight and does involve some processing time. Be prepared to wait six to eight weeks for the lender to complete your new payment schedule. You’ll also need to sign a new agreement with your new payment obligation as well as pay a fee -- typically a few hundred dollars. Otherwise, the process is fairly straightforward.
How to qualify for a mortgage recast
Not all loans are eligible for a mortgage recast. Government-backed loans such as VA, FHA and USDA loans usually don’t qualify for a recast. Your best bet is to reach out to your lender to inquire if a recast is an option for you.
Most lenders will require a minimum sum payment to recast your loan. They will also want to see that you make regularly scheduled payments.
Should you recast or refinance your mortgage?
Recasting a mortgage isn’t the same as refinancing a mortgage, and the two processes have different implications for your financial well-being.
A recast involves handing over a large sum of money and having your lender calculate new monthly payments based on your sizable one-time payment. A refinance involves paying off your mortgage and replacing it with a new loan that comes with a new set of terms and a new rate.
Here’s a rundown of the scenarios where each option may be a better fit:
When it’s wise to recast
If you’re satisfied with your mortgage rate and have a sizable balance in your bank account (think $10,000 or more), a recast might be a good decision. You’ll be able to immediately wipe away more of your debt without dealing with expensive closing costs. Be mindful of what else you might be able to do with that money, though, such as investing it for a higher return. And if you’re feeling any sense of financial uncertainty, you’re better off holding on to the funds.
When it’s wise to refinance
Right now, refinance activity has slowed down: According to data from Redfin, more than 90% of homeowners have mortgage rates lower than 6%, which means that refinancing in the current high-rate environment won’t result in a lower interest rate. However, if you need to borrow money for a big expense such as a home renovation project or to pay off a large chunk of high-interest debt, a cash-out refinance could make sense.
Here’s a rundown of the major differences between the two:
|One big payment results in lower monthly payments for the rest of term||No required payment toward principal|
|Rate and term stay the same||Rate and term change|
|Low fees (around $250 to $300)||High closing costs (an average of around $5,000)|
|Lender reamortizes your mortgage||Option to take out money with a cash-out refinance|
How to calculate your mortgage recast
Let’s say your outstanding mortgage balance is $250,000, and you have a 5% interest rate. Your monthly payments for principal and interest are currently $2,000, and you have 25 years left on the loan. If you make a one-time payment of $50,000 and pay a recasting fee of $300 for your lender to reamortize your loan. Now, your new payments are $1,171, saving you $829 each month for the remainder of your loan.
Before you move forward with a recast, make sure you ask your lender for a complete estimate of your new payments based on their math.
Pros and cons of mortgage recasting
Keep the same interest rate: Since mortgage rates are so high, you can hold on to your current (lower) rate as long as possible.
No ability to tap into equity: With a recast, you don’t have any option to take cash out based on your equity, which is one of the main upsides of a refinance.