How Mortgage Recasting Could Lower Your Payment Without Giving Up Your Low Rate
If you’re paying a mortgage, it’s likely one of your largest monthly bills. And although you may want to lower the payment, you may be reluctant to refinance because you don’t want to give up your loan’s low interest rate.
However, if you have a lump sum of money to put toward the principal, mortgage recasting may be another option. Unlike refinancing, a recast lets you keep your existing loan’s term and interest rate while reducing your mortgage balance and payment amount.
Learn More: Why Mortgage Rates Won't Fix the Housing Crisis — Even If They Drop to 4%
Read Next: How Middle-Class Earners Are Quietly Becoming Millionaires — and How You Can, Too
How To Lower Your Payment and Keep Your Interest Rate
Here’s how mortgage recasting works, based on an example from Brian Crist of Guild Mortgage, a residential mortgage officer with 33 years of experience.
“George obtained a 30-year, fixed-rate conventional mortgage in the amount of $300,000 two years ago,” he said. “His principal and interest payment is $1,798. George now has $75,000 that he would like to apply to his mortgage balance. If he simply sent in the $75,000 as an additional principal payment, his payment would not change.”
Crist said that because George wants a lower payment, he asks the lender to recast the mortgage. He explained that the lender recalculates George’s payment using the new balance of $217,405, which reflects the balance after two years of payments and the additional $75,000 principal payment.
As a result, the new principal and interest payment is now $1,337, lowering George's payment by $461, said Crist. Additionally, as long as George continues to make his minimum monthly payment of $1,337, his loan will mature right on schedule -- in 28 years, he added.
Who Are the Best Candidates for a Mortgage Recast?
Crist said the most common candidates are homeowners who buy a home before selling their existing one. He explained that once they sell their previous home, they pay down their new mortgage and enjoy the lower payment.
In this case, a mortgage lender may require at least two months of on-time payments to approve a mortgage recast, per PNC.
“Others receive large sums of money through inheritance, sales of a business, or even lottery or gambling winnings,” Crist added. “Less common are divorce settlements and life insurance proceeds received.”
How Much Can a Homeowner Realistically Lower Their Payment?
Crist said monthly payment reductions can be dramatic and depend on how much principal the homeowner chooses to contribute. He added that George's $461 savings is typical, but lower amounts, resulting in a $150 savings, are also common.
Loan Restrictions That Could Make Recasting Less Attractive
Crist said the loan type is the main restriction. He explained that recasting is available for conventional loans, including Fannie Mae and Freddie Mac mortgages, as well as some non-conventional loans.
However, he said loan servicers -- the companies that collect your monthly mortgage payments -- vary in whether they offer recasting and how they handle the process.
When It Might Make More Sense Not To Recast
If a homeowner wants to reduce their mortgage term without refinancing, recasting doesn’t make sense, said Crist. Instead, he explained, using George’s example, that the $75,000 could be applied to the principal balance, which keeps the payment at $1,798 but reduces the loan term to 15 years and six months.
Crist also pointed out that before applying a lump sum toward a mortgage recast, homeowners should plan carefully so they don’t deplete their cash reserves and end up in a financial pinch.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
More From MoneyLion: