A mortgage recast can be a useful way to lower your monthly mortgage payment after making a substantial payment toward your loan balance. But before requesting a recast, it can also make sense to compare it with another option: refinancing.
If mortgage rates have dropped since you purchased or last refinanced your home, refinancing may potentially provide a greater benefit. If your existing mortgage rate is already attractive, however, a recast may allow you to lower your payment while keeping that existing rate.
Understanding the difference can help you decide which strategy makes more sense for your situation.
What Is a Mortgage Recast?
A mortgage recast—sometimes called re-amortization—allows you to make a substantial payment toward the principal balance of an existing mortgage and then have the remaining balance recalculated over the remaining loan term.
The important distinction is that you are generally not replacing your mortgage. Your existing interest rate and remaining loan term stay the same, while the principal-and-interest payment is recalculated based on the lower balance.
For example, suppose you have 25 years remaining on your mortgage and make a large principal payment. If your loan is eligible for recasting, the servicer can recalculate the principal-and-interest payment using the new lower balance, your existing interest rate and the remaining 25-year term.
The result can be a lower required monthly principal-and-interest payment without obtaining an entirely new mortgage.
Making a Large Principal Payment Is Not the Same as Recasting
This is an important distinction.
You can generally make additional payments toward the principal of a mortgage without recasting it, subject to the terms of your loan. Doing so reduces the balance and can reduce the amount of interest paid over time.
However, simply making a large principal payment does not normally reduce your required monthly principal-and-interest payment. Without a recast, you generally continue making the scheduled payment and pay the mortgage off sooner.
A recast takes the lower balance and re-amortizes it over the remaining term, which is what can reduce the required principal-and-interest payment.
When Can a Mortgage Recast Be Useful?
One of the most useful applications involves buying a new home before selling your current home.
For example, you may purchase your new home with a smaller down payment because much of your equity is still tied up in the home you are selling. After the old home sells, you may be able to apply a substantial portion of the sale proceeds toward the new mortgage and then request a recast.
This can allow you to buy the new home without making the purchase contingent on selling your current home, while potentially lowering the new mortgage payment after the old property is sold.
A recast may also be worth considering after receiving a large bonus, commission, inheritance, investment proceeds or another significant amount of money that you want to apply toward your mortgage.
Not Every Mortgage Can Be Recast
Recast eligibility depends on the mortgage, investor and loan servicer. Requirements can vary, including the minimum principal reduction, how long the loan must have been outstanding, applicable fees and how frequently a loan may be recast.
Some mortgage programs or loan types may not permit recasting at all.
If you are planning a home purchase with the expectation that you will recast the mortgage later, confirm that the loan is eligible before choosing that financing strategy.
How Is Refinancing Different From Recasting?
A refinance replaces your existing mortgage with a new mortgage.
Because it is a new loan, refinancing may give you the opportunity to change your interest rate, loan term or loan program. Depending on the circumstances and available equity, refinancing may also provide other financing options.
Unlike a recast, refinancing generally involves qualifying for a new mortgage and may include appraisal, title, settlement and other closing costs or requirements.
That additional cost and qualification process is one reason a recast can be attractive when the existing mortgage already has favorable terms.
Before You Recast, Check Current Mortgage Rates
This is an important step that is easy to overlook.
Suppose you purchased a home and later sold your previous property. You now have a substantial amount of sale proceeds available to reduce the balance of your new mortgage.
Your first thought might be to apply the money toward the mortgage and recast the remaining balance. But before doing that, it can be worthwhile to compare your existing mortgage rate with the rates and terms available for refinancing at that time.
If mortgage rates have fallen meaningfully since you obtained the loan, refinancing may potentially provide a better overall result. You may be able to apply the lump sum toward the principal balance while also replacing the existing mortgage with a new loan at a lower interest rate.
On the other hand, if your existing mortgage rate is lower than current market rates, a recast may be particularly attractive because it can allow you to retain that existing rate while reducing the required principal-and-interest payment.
Recast vs. Refinance: What Should You Compare?
The lowest monthly payment does not necessarily identify the best financial option.
When comparing a mortgage recast with a refinance, consider the existing interest rate, available refinance rate, remaining loan term, proposed new loan term, closing costs, resulting monthly payment and how long you expect to keep the mortgage.
For example, refinancing into a new 30-year mortgage might lower a monthly payment partly because the repayment period has been extended. That does not automatically mean it is the better long-term financial decision.
A proper comparison should look at both the immediate payment and the longer-term cost of each option.
Recasting Can Also Provide Future Flexibility
After a recast, the required principal-and-interest payment may be lower, but you are generally not required to limit yourself to that lower payment.
If your budget allows, you may choose to continue paying more than the newly required amount and direct the additional amount toward principal. That can provide the flexibility of a lower required payment while still allowing you to accelerate repayment of the mortgage.
Which Option Is Better?
There is no universal answer.
A recast can be an excellent option when you have a substantial amount of money to apply toward the mortgage, want a lower required payment and already have an attractive interest rate.
Refinancing may make more sense when current mortgage rates or available loan terms are sufficiently better to justify replacing the existing mortgage and paying the associated costs.
If you are preparing to make a large principal payment, it is worth comparing both options before sending the money to your mortgage servicer. Once you understand the payment, costs and long-term implications of each strategy, you can make a much more informed decision.
Considering a mortgage recast or refinance?
Call or text me at 240-670-5090 or email me at CJMT@mainstreethl.com.
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