If you have a low interest rate on your mortgage loan, recasting it may be worth considering, instead of refinancing.
By Ana Staples
Your mortgage payment is probably the largest expense in your monthly budget. You’ve probably heard a lot about refinancing and how it can help by lowering your interest rate. But there’s another way to decrease your mortgage payment without closing costs and rate shopping — mortgage recasting. Mortgage recasting is making a large lump-sum payment on your mortgage for your lender to re-amortize it. CNBC Select outlines how this approach works and what to consider when deciding whether it’s right for you.
How does mortgage recasting work?
When you recast your mortgage loan, you make a large payment toward the principal balance. Your lender then re-amortizes the loan to reflect the new lower balance. This, in turn, decreases your monthly payments and how much you’ll pay in interest over the life of the loan. The rest of your loan terms remain the same, including the term length and interest rate. The process comes with an administrative fee that varies by lender but typically is a few hundred dollars.
How mortgage recasting can lower your mortgage payment You took out a $400,000 mortgage loan at a 5% interest rate with a monthly payment of $2,147. Ten years later, your outstanding balance was $325,368. You decided to recast a mortgage for a $250 fee. You put $60,000 toward the principal balance to re-amortize the loan, reducing the balance to $265,368. After recasting, your monthly payment decreased to $1,751 — $396 less than what you used to pay. In this scenario, you’ll pay $34,000 less in total interest throughout the rest of the loan’s life.
How to recast a mortgage
To recast a mortgage, you first need to make sure your mortgage lender offers it. Some major lenders, including Rocket Mortgage and Chase, advertise this option, while others don’t — meaning you’ll have to reach out to your provider to see if it’s available.
Further, you’ll typically need to meet the following requirements:
Have a conventional mortgage loan. Government-backed loans, such as VA, USDA and FHA loans, aren’t eligible for recasting.
Have enough equity in your home. Your lender is likely to require that you have sufficient equity. The exact amount varies by lender.
Have a large enough lump sum. While many lenders may allow you to contribute as little as $5,000 or $10,000, others may require that you make a larger lump sum payment of $50,000. Alternatively, the minimum lump sum can be a certain percentage of the loan balance.
Have a clean payment history. Generally, if you’ve been making late or insufficient payments on your mortgage your lender won’t allow you to recast your loan.
Deciding whether mortgage recasting is worth it
Mortgage recasting may be appealing since it allows you to lower your mortgage payment, as well as the total overall interest paid, without having to go through refinancing. Refinancing requires taking on a new mortgage loan with the goal to get a lower interest rate, which means you’ll also have to pay closing costs (usually, between 2% and 6% of the loan amount). It’s also a more complicated process — you’ll likely have to go through a credit check, home appraisal and income verification. You won’t need to do any of that to recast your mortgage as you’ll keep the same loan. This also means you’ll have the same interest rate, which can be an advantage if your current rate is low. For example, if you secured your mortgage in 2021 when the average mortgage rate dipped below 3%, you probably don’t want to part with your low interest rate now that the rates are much higher. On the other hand, if you took on a mortgage in a high-interest environment, refinancing can save you more money on interest in the long run, even considering closing costs. Recasting also won’t help you shorten your loan, so if that’s your goal, refinancing might be a better choice. If you’re choosing between the two options, it may also be helpful to pre-qualify for refinancing with a few lenders to estimate how much it can save you compared to recasting. CNBC Select recommends Ally Bank if you want to save on lender fees and Better.com for a straightforward refinance service with no origination fees.