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