What is recasting a mortgage, and how does it work?

Recasting a mortgage

Maybe you’ve heard someone say that they were recasting a mortgage and you were curious if it might be right for you. But like many mortgage-related things, it seems confusing to understand. Here, I’ll break down for you exactly what recasting a mortgage is and what the benefits and drawbacks might be for you.

Why would someone want to recast a mortgage?

The main reason to recast a mortgage is to lower your monthly payments. Recasting doesn’t shorten your term or change your interest rate, it simply lowers your payments.

Can anyone qualify for a recast of their mortgage?

To recast your mortgage, your bank must offer the service. It’s hard to say exactly how many banks offer the service and they are done on a case by case basis. Not all loans are eligible.

How can I find out if my mortgage can be recast?

The best way to find out is to write or call the company that owns your loan and ask. They may say that it is up to the company that services your loan. A company that services your loan is the company that takes your payments and handles the recording of payments. In that case, you would write or call the servicer to find out if it’s a service that they offer.

How does it work when you recast your mortgage?

What you are doing is paying a lump sum amount that reduces your loan balance, and then having your payments recalculated with that lower loan balance.

Just like if you had a lower loan balance, your payments would be lower. Recasting a mortgage lets you pay a lump sum to lower your loan balance and then realize the lower monthly payments that come with it, but mid-loan instead of having to refinance.

How is it different from refinancing?

When you refinance, you effectively apply for and receive a completely different loan with a different interest rate, and you can also get a different length or other adjustments. You have to submit all of your financials and get approval.

With a mortgage recasting, you bypass the qualification part, and the only thing that changes is your monthly payment. The length of loan, interest rate and everything else stays the same.

How much can I save on my monthly payment?

The amount that you save directly reflects the size of the lump sum that you put down to reduce your loan amount. So if you pay a large lump sum, your savings will be larger that if you paid a smaller lump sum.

How do I know if recasting a mortgage is right for me?

You’ll want to do the math. Consider whether the amount of the lump payment you would put down would make the reduced monthly payments worthwhile for you.

Are there drawbacks to recasting a mortgage?

The main drawback could be that you’re tying up a chunk of money into your property. But you’re also paying down your debt, effectively, and lowering your monthly payment. So it really depends on your own financial situation and your individual goals.

When do people choose to recast a mortgage instead of refinance a mortgage?

If you don’t want to go through a qualification, or in an era of higher interest rates, recasting a mortgage might make more sense, if your end goal is to reduce your monthly payments.

How does recasting a mortgage differ from paying extra principal payments?

Paying extra principal payments reduces the term of your mortgage. You end up paying your mortgage off in a shorter amount of time, with the same monthly payments. Recasting a mortgage lowers your monthly mortgage payments, but you have the same length of time on your mortgage.

Bottom line

Recasting a mortgage is an option that is more popular during times when interest rates are high and for people for whom paying down their loan amount and having lower payments is a priority, while reducing monthly payments. Owning less on your mortgage increases your home equity.

The best way to decide if it is right for you is to explore further the financial effects of recasting a mortgage compared with all the other alternatives before you make your decision.