Compare recasting with familiar options
- Refinancing. You lower your monthly payments, but you often pay hefty fees and go through a credit check.
- Paying off part of the principal with a lump sum. You can do this easily, but you’re only shortening the length of the mortgage; the monthly payments remain the same.
- Recasting. You reduce your monthly payments by paying a lump sum against your principal, but you skip the credit check and pay virtually no fees.
5 reasons to recast
- You’re self-employed or have poor credit, making refinancing a tough proposition.
- You recently refinanced your mortgage and don’t want to go through the cost and hassle again.
- You received an inheritance and believe you’re better off putting it toward your mortgage rather than investing it.
- You foresee trouble down the road — say, a downturn in your industry — and want to lower your monthly mortgage payments now to prepare for that.
- You usually invest spare cash in the stock market, but the outlook is so bleak you might as well reduce your mortgage. This is especially true if you also have a high mortgage and can’t refinance.
Because the fees are so small, you don’t have to figure out a breakeven point as you do with a refinance. However, if you have less than $5,000 in cash, it will be difficult to get your lender to agree to it, and it will make only a minimal difference anyway.
When recasting doesn’t pay
- If you pay a high rate and have good credit, a refinance may be worth the cost, especially if you have a legitimate need for a cash-out refi.
- If you have a lump sum and a mortgage at a low rate, you’re better off investing your money. The S&P 500 appreciated by about 15% in 2010. We know there’s no guarantee with the stock market, but that was certainly a better bet last year than paying down a 6% mortgage.
- If banks loosen up and grant new mortgages to riskier prospects. That makes a refinance a possibility if you have weak credit.
How recasting works
If your bank agrees to a recasting, you:
- Pay a lump sum toward your mortgage, typically $5,000 or more.
- Ask your lender to amortize the remaining balance and change your monthly payments, as opposed to just reducing the principal.
- Pay the lender a one-time fee in the neighborhood of $250.
Example: Applying $20,000 to recast the mortgage:
|Current status||Status after recasting|
|Remaining principal on mortgage: $200,000||Remaining principal on mortgage: $180,000|
|Years left on mortgage: 20||Years left on mortgage: 20|
|Interest rate: 6%||Interest rate: 6%|
|Monthly payments: $1,432.86||Monthly payments: $1,289.58|
Monthly reduction: $143.28
Monthly reduction x 240 (20 years) = $34,387.20
$34,387.20 - $20,000 (the initial lump sum) = $14,387.20 in total savings
How long will it take?
A recasting is technically simpler than a refinance, but it can take longer because you need the approval of the owner of the loan, which may not be the bank that services it, points out David Coster, chief consumer analyst for Mortgageloan.com. Some banks may take one to two months to process the request and then one to two months to implement the new payment. Ask the bank upfront.
Also, banks aren’t obligated to recast and have little incentive, given the low fees they get from the strategy. Still many banks will let you recast your loan as long as you ask — just don’t expect the bank to advertise it the way it might with a refinance.