You paid off your credit card debt. You slashed your student loans. The only thing left between you and debt freedom is paying off your mortgage. One of the most commonly talked about tools for paying off your mortgage early is refinancing. Let’s explore a less common tool that can be just as powerful: recasting your mortgage.
After learning what a mortgage recast is and investigating how recasting is different from refinancing, we will dig into the pros and cons of recasting your mortgage to help you decide if this real estate strategy is right for you.
What is Recasting Your Mortgage?
One of the most popular topics on the Marriage Kids and Money podcast is paying off your mortgage debt early. It makes sense. After all, that’s an incredible step toward living a debt-free life and it can help make you a young millionaire.
So how do you do it? There’s no one method to paying down your mortgage debt, but a mortgage recast can certainly help. In fact, a mortgage recast can reduce what you pay in interest and slash your monthly payment amounts.
Sounds pretty good, right? To recast your mortgage, you will make a large payment on the principal–or the amount you owe excluding interest–of the loan. After that, your mortgage lender reruns your mortgage numbers in what is called a reamortization. The reamortization–or new repayment schedule–should lower your monthly payments.
Mortgage Recasting Scenario
To illustrate how this works, let’s use some very simplified math. You originally have a $500,000 mortgage that charges 3% interest for 30 years. That means you pay $2,108 each month.
Now, you recast by putting a lump sum of $50,000 toward the principal. That drops your payments to $1,897 per month, which means you’re paying over $200 less per month for the entire life of the loan.
To learn more about how a recast would work in your situation, you can use a recast calculator online and crunch your exact numbers.
Mortgage Recasting Steps
If you qualify, you can actually recast your mortgage in a series of simple steps by working with your current lender.
Step 1 – Request a recast
In some instances, if you’ve already been making extra payments to shave down the balance of your loan, your lender might reach out to you about doing a recast. More likely, though, you will initiate the process.
Some banks and lenders advertise the service, but many do not. That means you might be able to click through the mortgage dashboard to find the information. In other cases, you will need to contact your lender by chat or phone to learn about their specific process.
Step 2 – Make a lump payment
After you start the recast process, your lender will typically ask you to make a lump-sum payment. Some lenders have a specific dollar amount that you have to pay as a minimum requirement. Others do not.
Keep in mind that the more you pay, the lower your principal balance drops. That then means that you can expect smaller monthly payments for the life of the loan.
Step 3 – Pay a servicing fee
While it’s not impossible for recasts to be done for free, it’s highly unlikely. Depending on your lender, you can expect to pay anywhere from $100 to $500 for a recast.
Step 4 – Move to your new repayment schedule
After your recast is complete, your loan will be reamortized. That’s a fancy way of saying that you will get a new payment schedule reflecting the amount of money you need to pay each month.
Note that it is important to keep paying your regular mortgage payment amounts until you know for certain that the reamortization takes effect. You haven’t come this far only to get hit with a penalty!
Step 5 – Put your money to work
Now that you’ve done a recast, you can start to plan for the extra money that you freed up. Maybe it means replenishing an emergency fund or growing a sinking fund.
Perhaps you're ready to get started with investing. Or maybe you’re going to take a staycation to celebrate. Whatever you decide, make sure it aligns with your financial plans and your values.
Who Might Recast?
Recasting your mortgage is a real estate strategy just about anyone could use, especially if one of these situations apply to you.
If you move into a new home before your original house sells, you might do a recast after the sale. By taking some or all of the proceeds from your sale and applying it to your new mortgage, you can slash what you owe each month.
Maybe you land a very generous bonus at work or perhaps an inheritance comes your way. You can use this windfall money to make that lump sum paying toward your mortgage.
Many times, people slash their budgets or start side hustles and then decide to pay a little bit extra on their mortgage every month or as often as they can. Another debt freedom strategy is to set money aside into a savings account, let your savings grow, and then make a lump sum payment.
How is Mortgage Recasting Different From Refinancing?
In a recast, you pay extra toward your mortgage principal, dropping the monthly payment amounts of your mortgage for the remainder of your loan. By recasting your mortgage, you pay less interest over the life of the loan.
Additionally, your recalculated payments are smaller. However, this recast is done within the existing loan. That means that the interest rate is unchanged.
Conversely, refinancing your mortgage involves taking out a new loan. After you apply for a new loan, this replaces your existing mortgage loan. Because your new loan is smaller, your payments should also decrease.
Refinancing is often used when mortgage interest rates drop significantly. For instance, maybe you purchased your home with a 30-year mortgage at a 4% interest rate. After several years of paying on this loan, interest rates plummet. You could then refinance into a new loan to take advantage of dramatically lower interest rates.
The Pros of Recasting Your Mortgage
There are a lot of benefits to this real estate strategy. Here are some of the top reasons why a mortgage recast might be in your future.
Lock In A Lower Payment
What would you do with an extra $200, $400, or even $600 a month? Depending on how much money you put toward your balance, you could free up hundreds and hundreds of dollars each month. That means that you can work on your other goals on your debt freedom journey.
Easy to Qualify For
If it’s been a while since you took out your mortgage or you simply blocked the ordeal out of your mind, let me remind you that qualifying for a mortgage is a lot of work! You have to prove employment and income. Lenders do a deep dive into your assets, so you have to document where they come from. Your credit score and history are evaluated. Recasting is not nearly as involved. Usually, it only involves requesting a recast and being able to make a lump-sum payment.
Cheaper Than Refinancing
Refinancing your mortgage is much more expensive than recasting. While the amounts depend on many variables, including your lender, most mortgage recasts only cost a couple hundred dollars.
The Cons of Recasting Your Mortgage
Recasting your mortgage isn’t for everyone. Before you make the decision to do a recast, you want to consider some of the biggest drawbacks.
There’s (Usually) A Fee
There is a cost. Recasting your mortgage is usually not free, albeit it generally isn’t very costly either. Still, some people prefer to avoid these fees and simply add to their regular monthly payments.
Recasting generally applies to conventional loans–think 15 or 30-year mortgages from a bank or other lender. That means if you have a government loan, like a VA or FHA loan, you cannot recast it. The same is usually true for jumbo loans from lenders.
Timeline Doesn’t Change
It is important to note that most recasts will not change the length of your loan. Your payments will be smaller and you will pay less interest. However, you still have a 15 or 30-year mortgage.
Closing Thoughts on Recasting Your Mortgage
As with all things in personal finance, there is no one-size-fits-all solution to paying off your mortgage or becoming a young millionaire. However, recasting your mortgage could certainly be a real estate strategy that fits your financial goals.
If you are looking to free up some extra money each month and save on interest for only a small fee, reach out to your lender to see if a recast option is right for you.
Are you working on becoming mortgage-free? What do you think of the idea of recasting your mortgage?
Please let us know in the comments below.