By Natalie Campisi, Bankrate
Mortgage recasting offers two attractive benefits for homeowners with some extra cash in their pocket: lower monthly payments and less interest paid over the life of the loan.
How mortgage recasting works
First, borrowers must make a large lump-sum payment toward the loan principal. Lenders usually require $5,000 or more to recast a mortgage. The remaining balance is then amortized to reduce the monthly payments. There are usually fees associated with recasting. The fees vary by lender; but they typically don't exceed a few hundred dollars.
Recasting not only results in lower monthly payments but borrowers will also pay less interest over the life of the loan. For example, if your 30-year mortgage carries a principal balance of $200,000 with a 5 percent interest rate, you might pay $1,200 per month. If you spend $50,000 to recast your mortgage, plus a $250 recasting fee, you'll end up saving almost $35,000 in interest payments and about $300 per month in monthly mortgage payments. Of course, the money you sink into the house in the recast won't be available for investing or other purposes.
Keep in mind, recasting doesn't reduce the length of your mortgage, just how much you pay each month.
Mortgage recasting qualifications and availability
Before you get excited about lower monthly payments, first make sure your lender offers recasting - many don't. It's also not something that's normally advertised, but most of the big banks offer it, including Chase, Bank of America and Wells Fargo. Plus, not all mortgages qualify for recasting; some types of loans, like FHA loans and VA loans, can't be recast.
Mortgage recasting vs. refinancing
There's a big difference between recasting a mortgage and refinancing one, even though both can help borrowers save money. Recasting is easier than refinancing because it requires only a lump sum of money in exchange for lower monthly payments.
With recasting, you're keeping your existing loan and adjusting the amortization. You wouldn't be able to get a lower interest rate with recasting, like you would with refinancing. On the other hand, if your interest rate is already low then refinancing could have a negative effect — especially if the current rates are higher.
Refinancing, conversely, requires that you apply for a brand-new loan and pay all the fees that go with it, such as closing costs and appraisal. The new loan would pay off your existing loan, so you could end up with a different type of mortgage as well as new interest rates.
People typically do this to get a lower interest rate or to go from an adjustable-rate mortgage to a fixed-rate mortgage. If you already have a fixed-rate mortgage with a low interest rate, then a refi wouldn't help you. On the other hand, if you have a low-interest, 30-year fixed-rate mortgage and want lower monthly payments, then you might consider a recast.
The benefits of mortgage recasting
Recasting has some appeal because it's fairly easy to do and it's a relatively inexpensive way to lower monthly payments if you have the cash. Here are a few reasons you might want to consider recasting your existing mortgage:
- Lower your monthly payments by making one lump sum.
- Avoid having to requalify for a new loan.
- Keep your interest rate if you currently have a low interest rate.
The drawbacks of mortgage recasting
The biggest financial drawback of recasting is that you're putting a large sum of money into equity. These are a few reasons you might want to rethink recasting:
- It doesn't shorten the length of your mortgage.
- Your interest rate stays the same, a disadvantage if you have a higher interest rate.
- Your cash is tied up in equity.
- Lender charges a fee, typically no more than a few hundred dollars, to recast a loan.
In the current climate, with relatively low mortgage rates and a strong market, a loan recast might not make sense for some.
Alternatives to mortgage recasting
The main motivator for people interested in recasting is to lower their monthly mortgage payment. However, because a hefty lump sum is required to get this benefit, Bill Rayman, vice president for mortgage lending at Guaranteed Rate, suggests there are far better ways to use that cash. Although borrowers will save on interest by recasting, putting money in a house has an opportunity cost and locks up that cash. There are other investment options that are more suited for borrowers who want liquidity and earnings on their cash before going the recasting route, according to Rayman.
"Even if you parked your money in a CD, you'd make something, and, more importantly, you'd have access to cash. In this market, you can choose from a wide variety of investment options. Whether it's high-risk growth stocks or low risk with bonds or some mix in between, you'll be earning something and you'll have access to cash," Rayman says.
Furthermore, Rayman cites the 2008 housing crash as an important factor in deciding whether to recast. By tying up large amounts of cash in a house, people could set themselves up for a big financial loss - especially since equity has no bearing on a home's value, he says.
"The most dramatic thing people don't realize about their homes is that it doesn't matter at all how much equity they have in that home as it relates to how much that home is worth. The home's value is established by the market. I've never had a buyer ask whether the seller owes 10 percent on the home or owns it outright. They don't care," Rayman says.
For borrowers who have other outstanding debt with high interest rates, such as student loans or car payments, it would make more fiscal sense to pay off that debt than to recast, Rayman says.
One more thing: You can cut the total amount of interest you pay on the mortgage simply by making extra principal payments from time to time. That won't lower your monthly payment at all, but you'll make fewer of those payments.
