Is Recasting a Mortgage Better Than Refinancing?

If you’re seeking ways to reduce your monthly mortgage payments without sacrificing your existing low interest rate, Mortgage Recasting may offer an elegant solution. In this article, we will delve into the benefits and drawbacks of Mortgage Recasting and compare it to Mortgage Refinancing.

What is Mortgage Recasting?

Mortgage Recasting comes into play when you have a lump sum of money to put towards your loan’s principal. This could be a work bonus or an inheritance, typically totaling $10,000 or more. When you choose to recast, you make a substantial one-time payment towards your loan’s principal balance. Your lender then adjusts your mortgage to reflect this new, lower balance. While your interest rate and term remain unchanged, your monthly payments decrease due to the reduced principal.

Keep in mind that mortgage lenders typically charge a service fee for facilitating the recasting process, usually amounting to a few hundred dollars.

How to Calculate Mortgage Recasting

Let’s take an example: You initially secured a $300,000 mortgage at an interest rate of 6.25% for a 30-year term. Here are the numbers:

• Loan Amount: $300,000

• Interest Rate: 6.25%

• Loan Term: 30 years

• Monthly Payment: $1,847.15

• Total Interest Paid: $364,974.58

• Total Payment Made: $664,974.58

Now, after ten years of payments, you’ve reduced the principal to $252,713.14, and you’ve paid $174,371.33 in interest. At this point, you decide to recast your mortgage by making a $50,000 lump sum payment. Here are the recalculated figures:

• Loan Amount: $202,713.14

• Interest Rate: 6.25%

• Loan Term: 20 years (remainder of the original loan)

• Monthly Payment: $1,337.82

• Total Interest Paid: $118,362.94

• Total Payment Made: $321,075.08

Comparing the total 30-year period with and without recasting:

• Monthly payment reduced from $1,847.15 to $1,337.82.

• Total interest paid without recasting: $364,974.58; with recasting: $174,371.33 (first 10 years) + $118,362.94 = $292,734.27. This saves you $72,240.31 (excluding recast fee) for an initial investment of $50,000.

Advantages and Disadvantages of Recasting

Advantages

1. Reduced Monthly Payment: Your monthly mortgage payment decreases.

2. Avoid Requalifying: You don’t need to go through the qualification process again since it’s the same loan.

3. Cost-Effective: Recasting is more cost-effective than refinancing, with a lower service fee compared to refinancing’s closing costs.

4. No Credit Score Check: Since you’re not taking out a new loan, there’s no credit score check.

5. No Property Appraisal: No need for a new property appraisal.

6. No Interest Rate Change: Particularly beneficial if you already have a low interest rate.

7. Avoid Prepayment Restrictions: You can reduce overall interest paid even if your current loan terms don’t allow prepayment.

8. Leverage Windfall: Using a windfall to pay down a high mortgage rate loan can yield a great return on investment.

9. Quick Start: You can begin the process a few months after finalizing your amortization schedule.

Disadvantages

1. No Interest Rate Change: You can’t take advantage of lower market interest rates.

2. Loan Term Unchanged: Your existing loan term remains the same.

3. Eligibility Restrictions: Some lenders and certain government programs may not allow mortgage recasting.

4. Minimum Payment: You must make the lender’s mandated minimum payment, typically exceeding $10,000, to be eligible.

5. Equity Lock-In: The lump sum payment is locked in equity, potentially resulting in an opportunity cost compared to other investment opportunities.

How Does Recasting Compare to Refinancing?

Refinancing Advantages

1. Change the Loan: Refinancing allows you to remove PMI, alter the loan term, or take advantage of lower market interest rates.

2. Change the Loan Type: Unlike recasting, you can switch to a new loan structure, such as an ARM or fixed-interest mortgage.

3. Change the Lender: You have the flexibility to change lenders if you’re unsatisfied with your current one.

Refinancing Disadvantages

1. Higher Closing Costs: Refinancing typically incurs higher closing costs (origination fees, appraisal fees) compared to recasting.

2. Higher Initial Interest Payments: Due to the front-loaded interest payments in the early stages of a mortgage, refinancing can slow down equity build-up.

3. Increased Total Interest Paid: Altering the loan period during refinancing may lead to paying more interest over the loan’s duration.

Conclusion

Both Refinancing and Recasting have their unique advantages and disadvantages. Your decision should be based on your specific financial situation and priorities.