Recasting your mortgage to lower monthly payments

How to Lower Your Mortgage Payment Without Refinancing

If you are thinking about refinancing in order to decrease your monthly mortgage payment, there may be another option that won’t require you to gather up your W2s and bank statements and pay the often hefty refinance charges.

It’s called “recasting” your mortgage.

According to the Wall Street Journal, “A recast refers to a borrower who makes an additional principal payment and then asks the bank to re-amortize the loan at the existing interest rate. The result is that while the loan term remains the same, monthly payments are reduced. Wells Fargo, Bank of America, JPMorgan Chase and Quicken Loans offer mortgage recasts on some, though not all, of their loans.

How does mortgage recasting work?

Most mortgage lenders will want you to pay down your mortgage a bit — usually $5,000 (or more).  Once you’ve made the payment, the remaining principal balance is then amortized to reduce the monthly payments.  It doesn’t change the current interest rate, it just takes your current balance and recalculates the payments over the remaining life of the loan.

EXAMPLE #1  Let’s say that you took out a 30-year mortgage on your home for $400,000. The interest rate was 5%, so you probably pay about $2,000 per month (not including insurance or taxes).  

Over the years, you’ve made extra payments and recently paid $25,000 towards the principal.  You now only owe $300,000 on your mortgage.

Recasting your mortgage will change your payment from $2,000 per month to $1,500 per month – a savings of $500/month and you will also pay less interest over the life of the loan.

EXAMPLE #2 Your 30-year mortgage carries a principal balance of $200,000 with a 5% interest rate, you probably pay about $1,200 per month.

If you spend $50,000 to recast your mortgage, your monthly mortgage payment will be about $300 less AND you’ll save about $35,000 in interest payments over the life of the loan.

Confirm that your lender offers mortgage recasting

Before you get too excited about lowering your monthly payments, call your mortgage lender to make sure that they offer recasting and see if they have a minimum payment that’s required.  Most of the larger banks like Wells Fargo and Chase will recast your mortgage for a nominal fee — usually, it is only about $250, but several lenders will do it at no cost.

** Please note that federally-backed loans like the VA Loan and FHA Loan are not able to be recast.  You can refinance these loans if you are determined to get that payment down!

Why don’t you ever hear about mortgage recasting?

Mortgage recasting isn’t well known for two key reasons.  Over the last 10 to 15 years, we’ve experienced record-low interest rates, so homeowners tend to go that route.  The other big reason is that mortgage lenders typically don’t make any money when recasting a mortgage.  Lenders can make 1% to 2% of the loan amount on a refinance (i.e. $3,000 to $6,000 on a $300,000 home) and on a recast, they may only make $200.

Is it right for you?

If your loan’s interest rate is at least 1% higher than the current rate and you know you’re going to stay in your home long enough to offset the cost of refinancing the loan, refinancing may be the better route to go.  Talk to a local lender like Waterstone Mortgage and see if the numbers make sense for your particular situation.

Recasting is ideal for those who have been paying their mortgage down and/or have a lump sum to apply towards the principal, already have a good interest rate and are just looking for an easy way to reduce the monthly payments.

One other school of thought is that just because you have the large lump sum of money to apply towards your current mortgage, doesn’t mean you should.  You may have to put a large lump sum down and it may not dramatically decrease your monthly payment.  Everyone’s financial situation is unique, so we highly recommend that you speak with your financial advisor to see if they recommend this route.

 

Example of how mortgage recasting works

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