Why You Should Get a Mortgage Recast

by David@MoneyNing.com · 26 comments

Is recasting your mortgage right for you? Do you know what it is, and how to request one from your lender?

Now that I firmly planted my foot in the land of the unfree with a fresh new mortgage, I set out to see if there are any quick and painless ways to reduce the monthly mortgage payments. While I was speaking with my lender over the phone, we talked about a loan recast, where my lender can lower my monthly payment for no cost.

No, not a refinance. A loan recast to lower your mortgage payment with no upfront costs.

What is a Loan (Mortgage) Recast

A loan recast is just a fancy term for re-amortizing your loan schedule with the remaining terms of the loan. Here’s how it works.

Let’s say you got a 30 year fixed mortgage for $500,000 at 5%. Plugging the numbers in a calculator, you get a monthly payment of $2,684.11. If you paid every monthly payment on time and at the same amount as required, you’d have $406,710.32 outstanding after 10 years.

Re-amortizing the balance for 20 years at this point gets you the same monthly payment of $2,684.11 since the remaining length of the term is still the same. No surprises there.

Now consider this alternate scenario. Let’s say that after 10 years, you got a windfall of $20,000 and decided to put it all towards the principal of the loan. The resulting loan balance would be $386,710.32, but due to how the mortgage system works, your monthly obligation would still be $2,684.11.

However, the situation changes if you request a loan recast with your $20,000 payment. Because your remaining balance is lower now, your re-amortized monthly payment becomes $2,552.12, quite a bit less than the original.

Benefits of a Loan Recast

Remember that a loan recast only lowers your monthly obligation, and is not the maximum that you can pay towards your mortgage. Once your monthly payment is lowered, you can still pay your original amount and have the extra money go towards your principal.

For the disciplined, this could be a wonderful option to increase flexibility without added costs. Remember, a loan recast doesn’t cost you a thing.

Caveats of Recasting Your Mortgage

Though I hear that many lenders will do it, none are required to recast your loan. If this interests you, check with your lender to see if this is even possible. Also, most lenders require a substantial minimum payment towards the principal to honor such requests (during my research, I read the $5,000 minimum quite a few times). So again, check with them first before you make any plans.

Also, make sure, and this is ultra important, to ask yourself whether this makes sense for your own situation.

Recasting a mortgage lowers your monthly obligation, but you are paying for this privilege with possibly more valuable liquidity. With riskfree returns at all time lows and so many people out of work, I see this being beneficial for people who have ample cash reserves and just want to pay less interests over time.

Also, flexibility always comes with responsibility. Does a lower payment just give you an excuse to spend more? Times are tough and a lower obligation makes quite a bit of sense right now, but remember that this reduction is permanent for the remainder of the loan. When normal times are back, are you then going to put in a higher amount to pay the loan down faster? Or is the extra purchasing power going to mean more shoes in future months?

David, Why Not Just Refinance?

That’s a great question. It’s probably why no one ever talks about recasting mortgages because with rates so low, practically everybody who has a home loan can simply refinance their mortgage to lower their monthly payment. Don’t forget, though, that refinancing costs money, as the fee is simply added to the total amount owed. At the end of the day, refinancing pushes the day you become debt-free further out.

Recasting, on the other hand, is quite the opposite. People interested in a loan recast should want to become mortgage-free sooner. The maneuver simply gives them more flexibility by having a lower required monthly payment, should they need the leeway in the future.

Lenders are also tightening lending standards these days. Lower rates sound great, but some people who are asset heavy with not much income, like small business owners, freelancers, and well to do savers who were recently laid off may not qualify for a new loan. A loan recast may help these groups of people pay less interest over time.

For example, a well to do saver who’s just been laid off may have $100,000 sitting around an online savings account earning 1.5% while paying 4% on a mortgage. That $100,000 may be very valuable for someone who just lost his income, but it may not be depending on his overall financial picture. The person is married, and their family can easily live on one income. His wife is also working in an industry that’s unaffected by the recent downturn.

They also made several large principal reduction payments in the last few years and never realized they can lower their monthly obligation.

By taking, say, $5,000 from their six-figure cash pile to pay down the loan even more, they may be able to substantially lower their mortgage payments by requesting a mortgage recast.

As you can see from the example above, recasting could make sense for some people.

Is a Loan Recast in Your Near Future?

So, what are you waiting for? Are you already looking up your lender’s phone number? Call the servicing company up to get a no-cost monthly payment reduction. I know I would be if I haven’t heard of this before and have unneeded cash lying around earning next to nothing. I would still plan to pay the original amount, but the lower payment may become useful later on.

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{ read the comments below or add one }

  • Frugal Rachel says:

    No way no how am I going to use my liquid savings to pay down my loan right now. Cash is king and lower payments sound awesome until you have to pay money into it.

    If anything, I want to TAKE CASH OUT right now.

    • David @ MoneyNing.com says:

      Paying down a laon definitely isn’t for everybody. Thanks for sharing your story Rachel.

      If you want to take cash out, have you started the process of refinancing your mortgage yet?

  • Jay King says:

    Good timing! I was just about to throw $10k at my balance. I’m calling my lender right now!

  • Jamie O says:

    This is why I come to MoneyNing.com.

    I’ve never heard of a mortgage recast. I have some money in an Ally Bank account so this could work for me.

    Let me discuss it with my hubby.

    • David @ MoneyNing.com says:

      Thank you for the endorsement Jamie!

      Let me know if you need any other information after you discuss with your husband!

  • Micky says:

    Wait, so it sounds like Dennis is saying that there’s a fee to getting a mortgage recast. Is it true?

    • David @ MoneyNing.com says:

      It does sound that way Micky. I don’t think every servicing is charging money for it though, especially the big banks.

      Who is servicing your mortgage? You really want to check with them to see how they handle mortgage recast requests.

  • Dennis says:

    My recast. Every 10000 I paid down, made my loan 50 dollars a month cheaper. 10000 in the bank will not get you 600 a year interest. My recast cost 300 one time fee. My interest on my loan is 4% the loan term did not change.

  • Matt says:

    If I’ve paid down a lot of money on the loan(and the object is to pay it off faster), do I have to put down additional money to be able to recast it? My thinking goes like this…get the recast amount, but keep paying my ‘normal’ mortgage payment, plus the extra I send each month, as this will let me pay down principal faster….

  • Lifeisdynamic says:

    The following is another way of financing you life when times are hard using your comparatively low interest mortgage rate, for example, if you are unemployed for a time; need to pay hospital bills; urgent repairs to your car, etc. It is known as a mortgage redraw. A mortgage redraw can be used for whatever purpose you need, and the bank does not ask what you want to use the money for, but I suggest that it is used a back-up plan only if times are tough and as a temporary measure. Not sure if US banks offer this ‘product’ opportunity, but it is worth inquiring if your circumstances suit. Australian banks allow mortgage redraw IF the borrower has equity in their property (borrowing back what you have already paid off your mortgage). The redraw is repaid back into the mortgage at the same interest rate as the original mortgage is being paid.

    Effectively the borrower requests the bank for a mortgage redraw. There is no new contract, so no additional fees, new contract or waiting for approval in writing – just a verbal check with your bank manager for the amount permissible to redraw (well …. this was the case in my experience). In Australia, your repayments are not altered, nor is the term of your loan, so it does mean you will need to increase your repayments or pay a chunks off your mortgage when you are in a better financial position. The banks do not place a demand on the borrower to repay the amount, as the redraw is tacked on to the back end of your original mortgage, so one way or another, the bank will get their money with additional interest! Of course, like all loans, the sooner you pay off the redraw, the more you will save by reducing the amount of interest you pay over the term of the whole mortgage.

    A mortgage loan, most often (in Aust) has the cheapest interest rate than most other lending products, certainly a lot less than credit card interest, and is therefore a better option for borrowing in hard times and without increasing your repayments during those times or having an additional loan product. It is quick and easy when you need money in a hurry and with minimal fuss, but again, I suggest it is used as a back-up plan for hard times – plan B or C and certainly a lot cheaper than using your credit card and no demand to pay the minimum balance by the end of the month!
    I would be interested to know if US banks have a similar lending ‘product’ and how it works for US citizens.

  • Theora55 says:

    If I had a mortgage at 5%, and I got a windfall, I’d refi to lower the rate, and maybe even lower the term. If you’ can go to a 20 year mortgage, you can lower your rate quite a bit. Since you’ve been paying that higher monthly cost, you can probably afford it.

  • Anita McAllister says:

    Even though this article was published over a year ago, it was at the top of the searches for “Recasting Your Mortgage” today for my own blog article research. I had heard about this and asked a couple of acquaintances who have been in the mortgage business for well over 20 years each – neither had heard of it. I did my own my research earlier this year and after checking with my mortgage company, I was able to take advantage of it. Thank you for educating the public about this subject! Anita M.

  • Xavier says:

    re: bond 6% for 20 years is better

    The article said: Also make sure, and this is ultra important, to ask yourself whether this makes sense for your own situation.

    What bond comes close to 6% for 20 years? Don’t answer coz there is none.

  • crazypete says:

    US treasuries maturing in 2030 are currently yielding 4.1%. There are corporate bonds yielding about 6% for that duration, but paying down a mortgage should be compared with the best available “risk free” return, otherwise you’re comparing apples and oranges.

  • Jimmy Wong says:

    This article is not so true in many cases, especially in this low interest rate economy. Here is way

    When you pay a large chunk of money upfront, your mortage payment surely will be reduce. But will it be a good choice if your interest rate is realy low? For example, if your mortage rate is 4.5%, $20000 of payment will reduce your monthly payment by $126.53 or $1518 annually (I didn’t take into account the resort fee some banks may charge.) On the other hand, if you use that $20000 to invest in 20 years amortization bond offer 6.0% annually, your yearly income from the bond would be $2386. So invest in bond would make you 2386 – 1518 = $868 better of. So, way should you do the mortage resort???

    For some instance, when a family have other high interest debt (credit card for example) which is higher than 4.5%. The answer is even more straight forward, “always” pay off the high rate debt first.

    In short, in this low rate mortage economy, resort is pretty much the last thing u would think of when you get a big chunk of windfall.

  • Robert says:

    I just checked with GMAC finance and they require a $5,000 minimum deposit and charge a $300 fee for the recast. The big advantage that I see in a recast over a refinance is that a) it is not a new loan, b) you don’t need all the approvals that you need with a new loan and c) your monthly payments retain their current principle/interest ratio and you don’t start paying mostly interest all over again as you do with a new loan. Three years ago I was paying roughly equal amounts toward interest and principle, while today I am paying almost twice as much toward principle as interest.

  • Quilless says:

    Just an FYI. Many lenders won’t do a recast at all. They will require you to refinance. And those that will do a recast often do require a minimum payment ($5000 is about right) and will also charge you a fee for the recast. My lender, CitiMortgage charges $500 for the recast. That may sound like a lot but it is still cheaper than the cost of refinancing when we already have a 4.5% interest rate. If you don’t already have a low interest rate, it may be a better idea to refinance your mortgage while the interest rates are at rock bottom. Then you can just use your extra cash to pay more down on your new loan so that you are financing a smaller amount. Just a thought.

  • CreditShout says:

    This is some great information. I liked how you emphasized the fact that this might not be for everyone and that they must evaluate their situation before they make any final decisions.

  • Ryan says:

    I had always wondered about something like this because we pay extra on our mortgage each month. It’s a nice way to gain some flexibility if things get tight. The only caution I would throw out there is for people who might use this as an opportunity for lifestyle expansion instead of maintaining their current payments (the flexibility is nice for someone who has lost his or her job or has taken a hit in income).

  • Atari Fun says:

    Wow, did know this… great article. Thanks.

  • basicmoneytips.com says:

    I had never heard of this either. However, I can see where it would have some benefit, so if there is really not an extra cost it is probably worth it.

  • Single Guy Money says:

    Thanks for posting this. I just recently heard about this and I think I will try to do it on my rental property.

  • Kate Kashman says:

    Thanks for that info. I used to work in mortgage banking (in the servicing/administration side) and either I’ve never heard of recasting, or it has been so long that I’ve forgotten about it. Definitely a great option for people who have a chunk of money.

  • marci357 says:

    always nice to read something new that even I didn’t know about 🙂

    Nice one.

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