What Is a Mortgage Recast?
Most people have heard of refinancing a mortgage.
But fewer homeowners know about another strategy called a mortgage recast, which can potentially lower a monthly payment significantly without changing the interest rate.
So what exactly is a recast?
A mortgage recast happens when a homeowner makes a large lump sum payment toward the principal balance of their mortgage and then asks the lender to “recalculate” the monthly payment based on the new lower balance.
The important part:
• The interest rate stays the same
• The loan term stays the same
• The monthly principal and interest payment is reduced because the loan balance is lower
Here’s a real-life example:
One of our clients purchased a $900,000 home and initially used $200,000 from investments as the down payment.
A few months later, after selling their previous home, they applied an additional $250,000 toward the mortgage balance and then completed a recast with their loan servicer.
Here’s what happened:
Original mortgage payment at 6.49%:
$5,168.75/month
New payment after recast using the SAME interest rate:
$3,590.23/month
Monthly savings:
$1,578.52/month
Even more impressive, the projected long-term interest savings over 15 years was approximately $216,000.
That’s the power of reducing principal early in the life of a mortgage.
A few important things to know about recasting:
• Not all loan types allow recasting
• Every loan servicer has different rules and timing requirements
• In this case, the servicer required the borrower to wait 4 months before recasting
• There is often a small administrative fee (this borrower paid $500)
• Most importantly: borrowers should contact their lender BEFORE sending a large lump sum payment
This last point is extremely important.
If a borrower simply sends a large principal payment without following the lender’s recast procedures, the loan balance may go down, but the monthly payment may NOT automatically be recalculated.
The lender will usually provide very specific instructions that must be followed for the recast to be completed properly.
Why do homeowners like recasting?
• Lower monthly payment
• Keep the existing interest rate
• No need to refinance into current market rates
• Lower cost than a refinance
• Helpful for “buy before you sell” situations
This strategy can be especially valuable for:
• Homeowners selling a departing residence after purchasing another home
• Buyers wanting to compete more aggressively before their current home sells
• Anyone planning to apply a large lump sum (think bonus, inheritance, etc) toward their mortgage balance in the future
As always, every situation is different. My team and I are happy to help clients explore whether a recast strategy may make sense based on their goals and timing.