What is a Mortgage Recast?
Based on my understanding of the term, recasting (also referred to as, re-amortization) is the lender saying to the borrower, “No, I won’t let you pay off your loan early or reduce your interest rate, but I will let you lower your monthly payment if you make a minimum, one-time principal reduction … for a fee.”
In other words, recasting your mortgage will reduce the balance you owe, but since recasts typically don’t include a shortening of the term or a lower interest rate, the net effect is simply a lower monthly mortgage payment.
Of course, since your monthly mortgage payment is reduced while everything else stays the same, this does result in interest savings. However, it’s usually less than the level of savings you could achieve if all of your extra, lump sum and overpayments were applied to principal reduction at the time they are made.
The following example is based on:
- Current balance of $100,000.
- Monthly payment of $1,073.65.
- 5% interest rate.
From this example you can get a good idea of the savings difference between a mortgage recast and what would happen if your mortgage lender would reduce your principal while keeping the same amortization schedule (Optimal terms).
TerTerTermsTermsLump Sum Pmt $Lump Sum PmtLump Sum PmtLump Sum Principal PaymentBal $BalBalanceBalancePmt $PmtPmtMonthly PaymentNPRNPRNPRPmts LeftCost $CostsCostsInterest & FeesSave $SaveSaveSavingsCurCurCurrentCurrent0$0$0$0100K$100K$100,000$100,0001074$1074$1,074$1,07411926824$26824$26,824$26,8240$0$0$0RecRecRecastRecast10K$10K$10,000$10,00090K$90K$90,000$90,000961$961$961$96111924532$24532$24,532$24,5322292$2292$2,292$2,292OptOptOptimalOptimal10K$10K$10,000$10,00090K$90K$90,000$90,0001074$1074$1,074$1,07410420947$20947$20,947$20,9475877$5877$5,877$5,877Rotate to landscape to view more complete formatting.All results are rounded to nearest dollar.All results are rounded to nearest dollar.All results are rounded to nearest dollar. NPR: Number of Payment Remaining NPR: Number of Payment Remaining NPR: Number of Payment Remaining
In the above example, making a lump-sum principal reduction while continuing to make the original payment amount would save $3,585 more in interest charges than recasting, and you would pay off your mortgage 15 months sooner.
Is Recasting a Good or Bad Idea?
First, as I’ve stated in numerous places throughout this site, if you have higher interest debt and/or you don’t have 3-6 months of income saved up in an emergency fund, you would likely benefit more from using any lump sum of cash for paying down high interest debt and building an emergency fund instead of paying down a mortgage balance (mortgages usually have the lowest interest rates, plus the interest payments may be tax-deductible).
Secondly, if your mortgage lender allows principal prepayments and credits them to your balance as they are made, and you can continue to make the original monthly payment amount, you would save more money just prepaying your principal instead of doing a formal recast.
On the other hand, if you have a fully-funded emergency fund, no higher interest debt, and your lender won’t credit principal prepayments as they are made, then recasting your mortgage might be a good idea – especially in cases where refinancing is either not an option or doesn’t offer any significant savings.
Also, if recasting is your lender’s only option for prepaying principal, recasting could help you escape Private Mortgage Insurance (PMI) earlier, which would save you more than the Mortgage Recast Calculator suggests.
Recasting Odds and Ends
Here are a few things to keep in mind if you’re considering checking into a re-amortization to lower your payment:
- Most lenders charge a fee for recasting ($150-$500) and most require a minimum principal payment ($1,000 – $10,000, or in some cases 10% of the balance owed).
- Not all mortgages qualify for recasting.
- Most lenders don’t advertise that they offer recasting (they would rather make a lot of free money from refinancing or from keeping you on your existing mortgage terms). So be sure to ask your lender if they offer recasting, and if so, whether or not your mortgage qualifies.