Recast a Mortgage, Reduce the Payment

A mortgage recast is one of the many ways save money long after closing on a home. After going through the home loan process there is an option reduce a monthly mortgage payment without refinancing the home loan. And the best part is that it doesn’t require all that nasty paperwork or those mortgage closing costs.  It’s call “recasting” the home loan. To recast a mortgage you need to call your mortgage servicer, instruct them that you want to do a recast, and put down a principal reduction.

Recast a Mortgage

To recast a mortgage means that an existing monthly payment is lowered by re-amortizing the remaining mortgage balance after a significant amount of money is applied towards the principal. This is different than doing a rate and term refinance to lower the payment.

A mortgage recast is one-time event and requires the homeowner to be proactive in alerting the mortgage servicer. A recast does not require any underwriting or mortgage documentation like the mortgage loan process. Yeah! A mortgage recast will will require an on-time payment history and the loan being current. Every company will operate differently and it’s at their discretion as to whether they’ll allow the recast.

Home loan recasts are typically only allowed once during a mortgage’s lifetime so plan accordingly. It could be prudent to wait for any future windfall of cash before doing recast to get the most bang for your buck. Most mortgage companies will require a minimum of $10,000 being put down towards the mortgage.

Recast a Mortgage Example

The best way to illustrate a recast is through an example.

Tommy Buys a Home

Let’s suppose it’s March and our best pal, Tommy, closes on a 30 year fixed-rate mortgage for $400,000. We’ll assume he has a 6% interest rate. Using our trusty Mortgage Payment Calculator we know that the principal and interest payment is $2,398 per month.

Now let’s assume exactly one year later Tommy wins $50,000 with a lotto scratch-off ticket. Tommy wants to put this newfound fortune towards his mortgage. At this point, Tommy owes approximately $395,000 on his home loan after one year of making on-time mortgage payments. Tommy can either do a “normal” principal reduction or he can recast a mortgage.

“Normal” Principal Reduction

A normal principal reduction is simple. Tommy can write a check for $50k and apply it towards his principal and lower his loan balance from $395,000 to $345,000. This will reduce his loan term to 22.3 instead of the original 30 years since he’ll continue to pay his regular monthly payment of $2,398. This principal reduction will also lessen the total mortgage interest paid on the loan from $463,350 (ish) to $290,850 (ish). That’s a reduction of $172,500 in paid interest. Not a bad way to spend $50,000 Tommy!

Recast a Mortgage

The other option Tommy can do is recast the mortgage. Tommy can call the mortgage servicer and tell them he wants to do a recast and not a normal principal reduction. They’ll explain that it’s a $350 to $700 fee and provide details on how to send the payment. Tommy does what they say. First the mortgage servicer applies the $50k to principal for a new $345,000 balance. Secondly, they amortize the loan with the existing 6% rate over the remaining 29 years of the loan. (Remember Tommy is doing this exactly one year after closing on a 30 year note; hence the 29 years.) Tommy now has a payment of $2,094 per month. That’s $304 lower per month than the original $2,398. The contrast of this recast from the “normal” principal reduction is that the loan will still last the full 30 years. The amount of total interest paid will be around $407,600. The result is about $55,700 less interest paid than the “normal” 30 year loan without the $50k applied.

 

Pros & Cons

“Should I Recast My Mortgage?” That’s the question. The advantage of a recast is that the monthly payment is reduced for little effort and minimal costs. If that’s a high priority then a mortgage recast makes sense. The disadvantage of the recast compared to a “normal” principal reduction is that the principal reduction significantly reduces the interest paid over the life of the loan. If paying less interest and reducing the term is a priority then don’t recast a mortgage and do the principal reduction.

When to Recast a Mortgage

There are a number of examples when it may be prudent to recast a mortgage. Here are a few of the most common examples:

  • Selling a Home: when someone buys a home before selling their existing home. Once the previous home sells the net proceeds from the sale – which can be determine from our seller’s net sheet calculator – can be applied to the new mortgage for a recast.
  • Retiring: Perhaps someone is retiring and is preparing to live off a fixed income. A primo scenario is if they receive a lump sum retirement payout through a golden parachute. They can use those proceeds to reduce the mortgage payment obligation via the recast.
  • Excess Cash: like Tommy in out example above, someone may have an abundance of liquid cash and would prefer a lower monthly obligation.

Check for Prepayment Penalties

Prepayment penalties in today’s post-mortgage-meltdown world are rare. They primarily exist with second lien mortgages and small banks. Prepayment payments are fees assessed by a mortgage holder for being paid off too quickly. These mortgage companies want to ensure they’re making money for issuing a loan. Some prepayment penalties can be issued even for a partial payment (i.e. a principal reduction). Be sure to check with your mortgage servicer before paying down the mortgage.