Fine-Tuning Your Mortgage: Can a Recast Loan Make Sense?

Image of people reviewing legal documents on a table with pens in hand. Captioned: Fine-Tuning Your Mortgage: Can a Recast Loan Make Sense?

A recast mortgage could be an option for homeowners who need to tweak their mortgage payments. Most big banks allow at least one recast for a client with a conventional (Fannie Mae or Freddie Mac) mortgage loan.

To recast the loan, the owner makes a lump-sum payment to the loan principal. The minimum amount that has to be made is the lender’s call. The lender then issues a new amortization schedule, now with lower payments. Reducing the debt left on the loan principal means there is now less interest to pay.

In short, the main idea with a loan recast is keeping the same loan terms — especially important to people whose loans already have low interest rates, and those who wish to avoid resetting the term of years — but lightening the monthly payment due from here on. A recast can be an appealing prospect for a homeowner who’d like to lower the principal in one fell swoop, leaving the length of the loan as it is, only with lower future payments.

What Are the Main Pros and Cons of a Mortgage Loan Recast?

The pros are based on the situation. For example, a homeowner might have a good deal of cash at a given time. Perhaps the homeowner inherited money, sold a property, or received a sizable bonus. At these times, a loan recast is just one way to adopt a disciplined spending pattern. By allocating a substantial sum of money to the home debt now, the owner has eased the monthly mortgage debt responsibility later. That can create greater peace of mind.

Now, what about the times when a recast loan is not the right option? What are the disadvantages?

Not surprisingly, there are fees to pay for the recast processing, although not as high as with many other loan products. If you have a large sum of money to put into your home equity, then you’re not likely to sweat a few hundred dollars, at most, in fees.

Still, there are a number of questions to ask before requesting a recast:

  • Is your current interest rate low, and are you happy keeping it? A loan recast will allow you to do so.
  • Did you pay off your higher-interest credit debt first? Addressing the drag of high-interest debt should be a homeowner’s financial priority.
  • After paying the lump sum into the mortgage, will you have adequate money on hand in a savings account in case you need it? Although recasting a mortgage is a quick and effective way to lighten the weight of debt, are you sure you want to tie up so much money in your home?

If you’ve thought through the ramifications and choose to recast, you’re injecting money into your house. Monetary value, once placed into the house, becomes unavailable for other uses, or for other investments. Therefore, some would argue that recasting a loan is a waste of good debt.

Why Recast, and Not Refinance?

The recast is a relatively uncomplicated process, compared to refinancing. It’s also a less costly, less intrusive process than refinancing. But why exactly would a homeowner decide to recast a mortgage?

When the homeowner is not currently eligible for refinancing.

A further reason to consider a mortgage loan recast involves the common situation in which a homeowner cannot get approved for a refinanced mortgage at the moment, due to a credit score issue or something else. The recast can help the homeowner pay the mortgage down faster by recasting the principal and continuing to make payments on schedule until mortgage approval becomes possible.

When the homeowner plans to make a change to a lower-income job situation.

Maybe the owner is aiming to work fewer hours a week, and needs an easily manageable monthly payment obligation in the years ahead. Maybe the homeowner is already experiencing the current monthly mortgage payment as a heavy drag on income. If a monthly mortgage payment is too onerous and the homeowner can inject a sizable sum now to bring total monthly housing costs below 28% of regular monthly income, as credit bureaus recommend, then recasting may be a good move. These circumstances present sensible reasons to pay more now and have a lighter load later — not to change any other terms of the loan.

When the borrower is buying a new home and selling another.

Another time a homeowner might ask for a recast, not a refinance, is soon after buying a new home. Few owners are ready to refinance immediately after buying, but they can be in the position to take profit earned from the sale of a previous home, and inject it into the new home’s mortgage through a recast. So, for example, a buyer might put the minimum amount down on a new home, then sell the current home, and direct profits from a sale to a recast on the new home — cutting the principal and lightening the monthly debt from here on.

Deeds.com offers some further ideas for our readers who are looking to sell one home while buying the next.

Refinancing Is an Intensive, Costly Process That Impacts the Title. Recasting Is Different.

Refinancing is time-consuming and paperwork-heavy. And, as we’ve noted, depending on which way the interest rates are moving, refinancing can be a financial mistake. The owner with a low interest rate has little incentive to apply for a loan with a different rate and timeline.

Moreover, the loan payoff timeline would probably be extended in refinancing. Usually, getting a new mortgage resets the term of years the owner will be paying it off. For the first few years of holding a new mortgage, the borrower is mainly paying off interest, and paying a lesser amount into the principal. By refinancing and resetting the loan — unless rates have gone down remarkably since the current mortgage agreement — a homeowner could increase the interest due over time.

But by recasting the loan, the homeowner slashes the principal. Thus, as long as the homeowner’s interest rate is fixed at a decent rate, recasting can make sense.

Recasting doesn’t require the homeowner to apply for a new mortgage and go through the appraisal and closing process. No papers need to be drafted and signed. There is no new lien on the title.

What Are the Chief Alternatives to Mortgage Recasting and Refinancing?

Not all lenders are going to permit mortgage recasting. But most mortgage agreements do allow the borrower to make early payoffs. The borrower may simply go on the mortgage servicer’s website, and make a lump-sum payment on the mortgage principal. This will decrease the loan balance, while monthly payments stay the same. In this way the borrower can pay off the loan earlier, and pay less interest overall. Paying more into the loan in this simple way may be advantageous, even if the overall savings aren’t quite as much as the borrower would get through a recast. For one thing, by simply paying a desired extra amount straight into the mortgage, the borrower needn’t deal with the payment minimum of a recast loan.

Another the borrower can stay on top of the mortgage is to pay a little more into the principal each month. Again, the borrower would simply go onto the mortgage servicer’s website and add extra to the monthly autopay. Set and forget. The big advantage here? If the borrower ever has to confront serious financial difficulties, it’s no problem to shift gears, change the monthly amount back down to where it was, and reserve more cash from then on.

Moving Forward…

Banks generally don’t advertise loan recasting, but many offer it upon request. If the option is there, it’s a good way to preserve the mortgage agreement’s terms, yet shrink the principal left on the loan and lighten your monthly payment obligation.

But recasting is certainly not the only choice. If you’re not sure which way to go, ask your mortgage broker to look at the numbers and plot out potential savings for each of your options.  

Photo credit: Aymanejed, via Pixabay.