You Could Save Money by “Recasting” Your Mortgage
Let’s say you receive a big one-time bonus at work, or perhaps an inheritance. Would it be financially savvy for you to put the money toward your mortgage? You’d be making a sizable one-time payment that wouldn’t entirely pay off your loan, but would at least put a nice dent in it — and lessen your future monthly payments. Making a lump-sum payment toward your mortgage is what’s known as “mortgage recasting.”
When you recast your mortgage, the terms won’t change, but your payment will be lower, explains Joel Richardson, senior loan officer with Prime Lending in Austin, Texas. “It’s important to note that most servicers have a minimum amount required to do a recast, so simply adding extra principal like $100 or even $1,000 won’t suffice,” Richardson explains. Also, most lenders charge a fee, anywhere from $250 to $500, to recast (or refigure) your loan.
Almost all conventional loans allow recasts, and most jumbo loans (i.e., those that are more expensive than conventional conforming loans) allow recasting. Government-backed loans — like FHA, VA, and USDA loans — don’t allow recasting, Richardson says.
On the outset, recasting might sound like a responsible thing to do. (Yay, less debt!). But it’s not the most effective strategy if your top priority is to cut down on the interest you’re paying on your loan, according to finance and mortgage experts. However, recasting could be a good idea if you’re looking to free up money in your budget immediately and have lower monthly payments for the duration of your mortgage.
To help put things in perspective and show how much more you could save on interest over time, Steve Hill, lead mortgage broker for SBC Lending, provided me with a few scenarios with a 30-year fixed-rate loan.
Option A: Regular Payments
You have a $500,000 loan at a 5 percent rate. That equals $2,684 per month with 30 years of payments.
Total payments over the life of the loan = $966,000
Option B: Mortgage Recast
You receive $100,000 in inheritance that you send to your loan servicer for a recast. This means you have a $400,000 loan at a 5 percent rate. That equals $2,147 per month with 30 years of payments.
Total payments over the life of the loan = $773,000
Option C: You Pay Down the Principal
You have $100,000 inheritance that you send to the servicer for a principal reduction, which means you pay off the loan 10.5 years sooner. Your monthly payment would still be $2,684 per month, but by paying off your loan earlier, you’ll save more on interest.
Total payments over the life of the loan = $727,000
Here’s What to Know
Hill’s takeaway: Even when you have a large lump sum, a principal reduction saves you more money in the long run than a recast. In this scenario, it saves about $46,000 more, because paying the loan off a decade faster is more impactful than having a lower payment. “The longer you’re in the loan, the better it is for the bank,” Hill explains.
Even better, paying down the principal is a strategy you don’t even need a stack of cash to do — you can just put extra money toward your mortgage every month. Should mortgage interest rates drop, you may be better off refinancing your mortgage to lower how much you’re paying in interest.
However, if recasting your mortgage is something you’re interested in, it can be beneficial if you plan to stay in your home long-term and free up some cash in your monthly budget, says financial planner Ross Loehr, CFP with The Sovereign Investor. The next step would be to check with your lender to determine if your home qualifies, he says.