Everyone with a mortgage has heard of refinancing, but did you know there is an alternative to lower your mortgage payments? While refinancing is the popular choice, recasting may be a better option depending on your circumstances.
What is a Mortgage Recast?
If you meet the criteria below, recasting may benefit you.
- You are well ahead of your loan re-payment schedule because you have made extra principal payments.
- Current interest rates are similar to your mortgage interest rate. Within 0.5%.
- You want to lower your minimum monthly payments and save on interest.
- You plan to live in your home for at least 2 more years.
If you have been paying extra principal towards your mortgage, you can recast your mortgage. For example, you could have used your inheritance, lottery winnings, or Velocity Banking to pay down $50,000 of your $250,000, 30 year mortgage, putting you way ahead of the 30 year loan repayment schedule. You can recast your mortgage as a $200,000 mortgage using the same interest rate and the remainder of the 30 year term.
In other words, if you are well ahead of your loan repayment schedule you can recast your mortgage to a lower monthly payment, resulting in less interest paid over the remaining life of the loan. What happens in a recast is that your lender will recalculate your monthly payments based on your lower-than-projected loan balance. This will result in a lower minimum monthly payment and a lower interest payment over the remaining life of your loan. The payback of a recast is usually less than 2 years.
What is a Mortgage Refinance?
If you meet the criteria below, refinancing may benefit you.
- You are early in your mortgage term.
- You have good credit.
- You have an interest rate that is at least 0.5% higher than current rates.
- You want to lower your minimum monthly payments.
- You plan to live in your home for at least 7 more years.
Refinancing is replacing your existing loan with a new loan containing new terms. You can go from a 15 year loan to a 30 year loan or a convention loan to an ARM loan. You can go from 4% interest to 3% interest. In a Refinance, or Refi, your new lender pays off the loan with your old lender so that you can make payments to your new lender going forward. You can refi with cash out or you can refinance to your lower mortgage balance. For example if your current mortgage is $225,000, you can refinance to a higher $250,000 so that you can use the extra $25,000 to pay for a renovation or a new car. I don’t recommend doing this because you should use a refi to save, not to spend more.
Pro’s and Con’s of Recasting
- Recasting is easier to get approved for. You already have the loan. You are just requesting that your lender recalculates your payments.
- Some lenders may require that you pre-pay a minimum amount in order to recast your mortgage.
- Less paperwork is required in recasting. Most won’t even check your credit report. The process is quick and easy.
- Not all lenders offer recasting and most don’t allow recasting Jumbo Loans.
- Recasting is much cheaper than refinancing. You can recoup your recast fee within the first 2 years in most cases.
- Recasting is not available with FHA or VA loans.
- The desire to recast your mortgage often requires a written letter or email stating your intent and purpose in recasting.
Pro’s and Con’s of Refinancing
- Refinancing allows you to change terms, usually to something more favorable – lower interest, lower payments, etc.
- It can be very expensive to refinance. It can cost you between $5,000 and $10,000 in most cases. You have to pay for closing costs, title search costs, appraisal fees, origination fees, and sometimes point fees.
- Refinancing can be MORE expensive depending on many factors. If you have 18 years left in your current mortgage and you refinance to a 30 year mortgage for a lower interest rate and a lower payment, Guess What? You have already paid most of the interest on your old mortgage and you are starting your interest payments all over again. Remember that loan interest is amortized, meaning you pay most of the loan interest up front. To see how much interest you will pay over the life of your loan, check out my Loan Amortization Spreadsheet.
- A Refi could take anywhere from 1 to 6 months. It requires more paperwork, credit checks, proof of income and proof of work history.
Alternatives
Don’t recast or refinance. Instead, consider one of these strategies:
Pay Extra Monthly Principal – Making extra monthly payments towards your principal could cut your mortgage payment schedule in half and save you thousands in interest.
Velocity Banking – Make lump sum principal payments every x number of months. Because of the way amortized loan interest is calculated, this is the quickest and most cost effective way to save time and interest on your loans. Learn more on my Velocity Banking Getting Started page.
PRO TIP: YOUR MORTGAGE IS DUE ON THE 1ST OF THE MONTH. MAKE YOUR MORTGAGE PAYMENT 1-2 DAYS BEFORE THE DUE DATE. THIS WILL LOWER YOUR ENDING BALANCE THUS REDUCING YOUR INTEREST PAYMENT ON THE 1ST.
What Did We Do?
My wife and I did not learn about Recasting until 6 months after we refinanced. We are using velocity banking to pay off our $282,000 mortgage by the end of 2026 in a total of 7 years! You can Follow Our Journey Here. Out of curiosity, I called our lender to ask them about recasting the remainder of our mortgage. We are at year 1 of our 30 term with more than $50,000 in principal paid off since we refinanced in 2021. Since we were velocity banking our mortgage, did recasting make sense? Here is what we found.
Velocity Banking combined with Recasting would have saved us net $3000 in interest over the remaining life of the loan. In our case, the remaining life of our loan is effectively 4 years if our velocity banking schedule goes to plan. While recasting could have saved us $3,000 in interest, it would have increased our repayment term from 41 months to 51 months. Almost a full year later. We decided it was not worth waiting another year to save $3000.
While recasting wasn’t for us, it can be a very useful interest savings strategy for those who have consistently paid extra principal towards their mortgage.
