Recasting Your Mortgage to Save Money


If you've been unable to refinance your mortgage or get a loan modification, you may have heard about recasting your mortgage as an alternative. But what does that involve and can it really help?

Simply put, recasting your mortgage is a way to lower your monthly payments by making a lump sum payment to reduce your outstanding balance. Your monthly mortgage payments are then recalculated based on the new, lower outstanding balance. Your interest rate stays the same.

That might not sound like much - you're just paying down your mortgage faster, but taking a reduced monthly payment instead of an earlier payoff date. The savings aren't nearly as much as you can get through refinancing or a loan modification. But there are times when recasting your mortgage might be a good financial decision.

Lump sum of cash needed

To recast your mortgage, you first of all need to have a lump sum of cash you can part. Most banks will require you to put up at least $5,000 for them to recast your loan. You'll likely have to put up more than that if you want a significant reduction in your monthly payment.

Here's how it works. Let's say you still owe $200,000 on a 30-year fixed-rate mortgage at 7 percent with 20 years remaining, with monthly payments of $1,551. Recasting your mortgage with a $20,000 lump-sum payment would reduce the balance to $180,000, meaning your monthly payments could be reset to $1,396 and still pay off the loan in 20 years.

That gives you a monthly savings of $156 which, over 20 years, adds up to about $37,400 (figures have been rounded off). Subtracting the $20,000 you paid to reduce your loan balance, that means a total savings of $17,400 over 20 years, or about $870 in interest savings a year.

A type of safe investment

Recasting your mortgage can be a good idea if you have a lump sum of cash available and are looking for a good way to invest it. Don't forget, using $20,000 to pay down a fixed-rate mortgage at 7 percent interest provides essentially the same economic return as investing that money in a bond that pays a 7 percent return! The difference is that your 7 percent return is in money saved, rather than money paid to you (Not counting the tax impacts of either approach).

Plus it's a safe investment - your 7 percent return is guaranteed, as long as you keep up with your newly reduced payments.

People who recast their mortgage often do so after receiving a sum of money through an inheritance, legal settlement, selling another property, work bonus, retirement buyout or other means.

Low costs, some restrictions

The nice thing about recasting a mortgage is that most lenders are willing to do it with little prodding - it doesn't even matter if you're underwater on your mortgage. The fees are very low as well, particularly when compared with refinancing - the typical cost is a couple hundred dollars or so.

Even if you can't currently refinance, recasting puts you in a better equity position, so you may be able to refinance sooner down the road than you would if you simply continued to make your regular mortgage payments.

There are some limitations. You can't have an FHA or VA mortgage recast (although streamlined refinancing is available on both for borrowers who have kept up with their payments) and may not be allowed on some jumbo loans. It can also be difficult to have an ARM recast. But generally speaking, most conventional mortgages backed by Fannie Mae or Freddie Mac can be recast.

Recasting isn't a service that lenders advertise - you have to initiate the request with your mortgage lender yourself. It may also take a month or two to get approved. Finally, it's also a good idea to check with a financial advisor to see if recasting your loan would be a good use of your available funds.

First published on at:

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Personal Finance , Banking and Loans

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