Recasting Your Mortgage

I’ve received some questions about this and have recently gone down the decision road myself, so let’s talk about recasting your mortgage, how it works, pros and cons, and so forth.

What is a Recast?

Recasting a home loan isn’t refinancing. When you recast you’re working with the same loan terms, such as length and interest rate, while lowering your loan balance with a lump sum payment. Your lender then reworks your amortization schedule and lowers your monthly payment accordingly.

Here’s an example:

Say you’re five years into a 30yr loan with a $350,000 balance. At 3.5% interest your monthly principal and interest payment is about $1,796. If you paid $100,000 to the principal you’d now owe $250,000 with the same 25 years remaining. Your new payment would be $1,252, a savings of $544 each month for the life of the loan.

Why recast?

To save money, of course! The borrower in our simplified example would see their annual cash flow increase over $6,500 while also shaving off about $51,000 of interest expense if they made every loan payment. And you could potentially drop add-ons like private mortgage insurance if your loan-to-value ratio gets low enough, meaning more savings.

Here’s a good calculator to run an amortization schedule using your loan numbers. I’ve been using this guy’s site for years and it’s pretty straightforward.

https://bretwhissel.net/cgi-bin/amortize

Okay, so it’s clear why someone would want to recast but let’s consider the specifics.

You need to find out if recasting is possible since not all loan types and lenders offer this. My understanding is that FHA and VA loans don’t allow recasting, for example. Best bet is to reach out to your lender and ask.

Your lender likely has a minimum recast amount, such as $10,000 or maybe a percentage of your loan balance. Do you have that kind of cash sitting at the bank or maybe in a brokerage account? You won’t want to hit your retirement accounts for this so the cash has to be readily available.

There’s a processing fee and it takes a little time. My lender, Rocket Mortgage, had a $10,000 minimum, charged $250, and took about two billing cycles to lower my payment when I did a recast. And while they would have accepted a personal check I sent a wire transfer that cost $25, so add that cost as well.

Again, once the money is paid and the process completed you’re simply continuing your original loan terms but with a lower balance and payment. Recasting is really pretty simple but it’s not for everyone.

Here are some reasons why this may not work for you.

You don’t have an extra bundle of cash to put against your mortgage balance. Once you make the lump sum payment the only way to get the cash back is to borrow (assuming you qualify) or sell your home (assuming the market value remains high enough to cash you out). So this cash may be liquid now but it certainly won’t be when you’re recast is complete.

Also, while you can make extra principal payments on your loan anytime I don’t suggest paying a larger lump sum without first considering a recast. Doing so would save you interest expense over the long-term by paying your mortgage off early but would leave your contractually obligated payment the same in the meantime. Might as well reduce this too and give yourself some options since the recast expense is relatively low.

Your loan terms are bad, or at least not great. Maybe your interest rate is too high or maybe it’s an adjustable loan that you don’t intend to keep long-term. If so, maybe your financial situation has changed enough that you could refinance your loan instead of recasting. A good mortgage broker could help determine what you qualify for. If you think you fall into this category and have cash to put against your loan it’s reasonable to have a mortgage broker do a soft credit check so you can talk numbers. You could bring your cash to the refi to “buy down” your interest rate. And be sure to ask about the cost of any loan programs they mention. My recast cost $275 with the wire fee but the full cost of refinancing could easily be well over $5,000. Don’t make that decision lightly.

You’re not planning to stay in the home for at least the next five years. This is a facts-and-circumstances sort of thing but I suggest doing something else with your lump sum payment if this home isn’t a keeper.

You prefer maintaining your liquidity and, hopefully, are doing something productive with the money. My recast example used a 3.5% loan and a lot of homeowners are in that range now. You can buy 1yr bank CDs (at least right now) at about 4.9% and bond investments are there too with some potential upside (and downside but let’s be positive). Stocks have a higher expected return, of course, but I’ve always hated bringing stocks into comparisons like this because it’s really a different ballgame. Anyway, if the rate you’re earning on your excess cash is higher than your mortgage rate you may just want to ride that for a while. Or, like me, maybe you decide to keep liquid money working while also doing a recast – it’s great to have options.

Additionally, instead of a recast you could use extra liquidity to indirectly get more money into your retirement plan at work, fully fund your HSA, and maybe fund a 529 plan for your kids or grandkids. There are lots of options to consider and all are probably better than leaving a lump sum of cash to earn essentially nothing.

Ultimately, recasting a mortgage can be great for those who have a chunk of available cash, and a mortgage and home they prefer to keep a while. There are always other considerations but let me know if I’m missing anything important to you.

Have questions? Ask us. We can help.