After publishing, The Hardest Mortgage Refinance Ever, a reader asked me whether I've ever considered recasting a mortgage instead.
My quick answer was no, despite having refinanced multiple mortgages on multiple properties since 2005. I'm all about getting the lowest mortgage rate possible.
Recasting a mortgage can be a good idea if you come into a lump sum of cash and want to reduce your monthly mortgage payment while not having to go through the hassle of refinancing.
In this post, I'd like to explain what a mortgage recast is, its pros, its cons, and why you may want to recast a mortgage instead of refinance.
Just because I've only refinanced my mortgages doesn't mean that we should ignore the benefits of recasting a mortgage instead. For those of you who’ve recast, feel free to pitch in as well.
What Is A Mortgage Loan Recast?
A mortgage recast is a feature in some types of mortgages where the remaining payments are recalculated based on a new amortization schedule. During a mortgage recasting, an individual pays an additional lump sum toward their principal, and their mortgage is then recalculated based on the new balance.
For example, let's say you’re 5 years into a 30-year amortizing mortgage at 4%. Your loan size is $500,000 and the value of your property is $700,000 for a 71.4% LTV. Your monthly payment is $2,387.
You're happy with your lender, happy with your 4% mortgage rate, have a loan that allows you to recast, and you don't want to go through the hassle of refinancing a loan and paying excessive fees. Further, you just inherited $200,000 from your late aunt.
If you use the $200,000 to pay down principal from $500,000 to $300,000, your monthly mortgage payment will stay the same at $2,387. The only thing that will change is the percentage of payment going towards principal (more) and interest (less). If your goal is to increase monthly cash flow, paying down principal, without refinancing or recasting, won't help you.
But if your lender allows you to recast your mortgage, you can use the $200,000 to pay down principal, and have the remaining $300,000 amortize on a new 25-year amortizing schedule. If so, your new monthly payment would decline by $803 to $1,584.
Determining Eligibility To Recast Your Mortgage
To recast your loan, your lender usually requires you to pay down a lump sum towards principal. Paying down 5% or more is common. There is also usually a small fee to recast (<$300 or free). Further, not all mortgages have the option to recast.
Loan recasts are allowed on conventional, conforming Fannie Mae and Freddie Mac loans, but not on FHA mortgage loans or VA loans. FHA and VA loans already give borrowers a lot of benefits such as a lower downpayment and subsidized lower interest rates.
Some lenders recast jumbo loans, negative amortization loans, and option ARMS, but consider them on a case-by-case basis. You're just going to have to ask your lender whether your loan is eligible. Further, before refinancing your loan, you should ask as well.
Finally, to qualify for a loan recast, you must be current on your loan payments and have the cash necessary to pay down your principal balance.
Advantages of Mortgage Recasting
Here are the main advantages of mortgage recasting versus mortgage refinancing. They are:
- Reduced Payment. By paying down a lump sum, you will reduce your monthly payments.
- No Appraisal Required. Unlike a home refinance, a loan recast does not require an appraisal. The average cost of a home appraisal is between $600 – $800, depending on size of your house and where you live. My last appraisal cost $620 with WF, but $800 with Citi for the same house!
- No Credit Check Needed. Loan recasts generally do not require credit approval. This is great if you have suboptimal credit or can't get the best refinance rate due to your suboptimal credit. The average credit score for a qualified mortgage is now roughly 760.
- Prevents You From Slacking Off. Given you need to come up with a lump sum to recast your mortgage, you are taking the right step to pay down your loan and pay less interest. It is very easy to refinance your mortgage multiple times and delay paying it off because the amortization schedule always resets to zero.
- Improves A Transition Finance Problem. In some cases, you might buy a new home before selling your current home. I never recommend doing this given so many things can fall through when trying to sell. But if you do, you may temporarily need to pay two mortgages. If you have any proceeds from your home sale, you can use those proceeds to recast your mortgage to lower your payments. Given you just got a new mortgage for your new home, it rarely makes sense to refinance given the rates probably haven't changed much and the fees incurred would make refinancing so soon not worth it.
Disadvantages of Mortgage Recasting
Now that we've discussed the benefits of mortgage recasting, let's look at the negatives.
- Requires A Lot Of Cash. In order to recast a mortgage, you need to come up with a large lump sum. Depending on your liquidity situation, injecting more cash into a primary residence may not be the wisest move. Not only will you reduce your liquidity, you will also forgo any potential returns your cash might generate. If you have other debt at higher interest rates, it may be better to implement FS-DAIR and pay down other debt first.
- Doesn’t Reduce Mortgage Term. A loan recast will not shorten your loan term, it will just keep you on track with a lower payment. If you want to shorten your mortgage term, you will need to keep paying extra principal after the mortgage recast is complete.
- Your Interest Rate Stays The Same. A recast lowers your monthly payments, but it doesn't lower your interest rate. My latest refinance was for 2.625%. If I was able to recast my mortgage, I would be paying 4.5%, despite only having 25 years left.
Who Is The Ideal Candidate For Recasting A Mortgage?
Here are some conditions I think that if met, would make you an ideal candidate for recasting a mortgage.
- Needs to reduce monthly expenses.
- Does not have any better investment ideas for his or her cash.
- Does not want to go through the pain of refinancing a mortgage.
- Does not have a high enough credit score to refinance to a better rate.
- Does not want to pay expensive refinance fees.
- Does not qualify for a “no-cost refinance.”
- Has a mortgage on the smaller side (<$300,000), which makes refinancing cost-ineffective due to the fees.
- Is a more conservative investor who prefers to simplify life.
- Really likes his or her existing mortgage rate or can't qualify for a better one.
If I could rewind time, I still wouldn't recast any of my mortgages because I'm all about trying to lower my mortgage rate to save money.
It would make no sense for me to recast my previous mortgage at 4.5% given I could refinance at 2.625%. To ensure that I don't spend 30 years paying off the mortgage, I plan on paying down about $80,000 in principal each year so that I have a zero balance by October 1, 2026.
Refinancing Should Save More Money
In my opinion, refinancing to a lower rate if the fees allow you to breakeven within 24 months is better than recasting. I've always either refinanced when my breakeven was under 12 months or my refinance was a no-cost refinance.
I also think recasting a mortgage is better than doing nothing because you're paying down debt and reducing your monthly expenses.
Finally, getting a fixed-rate mortgage amortized over 30 years is better than renting for 30 years. In 30 years, your $2,000 a month rent payment will increase to $4,854 assuming a 3% annual growth rate.
Meanwhile, your $2,000 mortgage payment will stay fixed and eventually go to $0. As an added bonus, you will then have an asset to rent out or sell if you wish.
Recasting a mortgage isn't for everyone, but it could be for you. Always do the math before making a decision. Look at all your options and feel blessed that you have some.
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The Benefits Of Recasting Over Refinancing A Mortgage is a Financial Samurai original post.