For many years now homeowners have turned to mortgage refinancing to lower their monthly mortgage payments and reduce their interest costs. Refinancing can be beneficial if you are able to obtain a lower interest rate, or converting an adjustable-rate mortgage loan to a fixed-rate mortgage, but a mortgage refinance can have some hefty up-front charges due to closing costs, etc.
Refinancing is a restructuring of your debt and regardless of whether you are using the same lender, or a new lender, you will need to apply for the loan and demonstrate credit worthiness. Closing costs will vary but can easily reach several thousands of dollars as the loan origination fee alone is typically about 1% of the total value of your loan. The benefit to refinancing is the ability to reduce your total interest cost by getting a better interest rate, or by lowering your monthly mortgage payments by extending the term of your mortgage loan. For example, refinancing a 30 year mortgage that has 18 years left on the term to a new 30 year mortgage.
Recasting, or re-amortizing, is a lesser known, rarely advertised option that is available through some mortgage lenders. Unlike refinancing, you keep your existing loan and adjust the amortization schedule only. There are no closing costs, appraisal fees, etc., and you don’t have to apply for a new loan, so you won’t have to submit yourself to another credit check. Lenders who offer the recasting option typically charge a reasonable administrative fee of $150 or more, but it is significantly lower than the cost to refinance.
What is Recasting?
As I mentioned in the prior paragraph, with recasting, your loan is simply re-amortized based on the current principal amount you owe, the remaining number of payments on your loan, and the interest rate that your loan carries. If you are 8 years into a 30 year fixed mortgage, recasting would modify the monthly mortgage payments for the remaining 22 years. Recasting will not reduce the length of your mortgage term.
Can Everybody do this?
While most mortgage lenders offer a recasting option, some do not. Most of the larger lenders such as Wells Fargo, Chase, and Bank of America, offer it. However, not all mortgages will qualify for recasting. FHA and VA loans, for example, are not eligible.
When Recasting Might be Applicable.
Let’s say that you are ten years into a 30-year fixed-rate loan, where you borrowed $350,000 at 4.50%. You have been paying about $1,774 per month in principal and interest payments and you now have a balance of $280,313. You receive a $100,000 inheritance and, while you would like to invest some of it, you would also like to reduce your monthly mortgage payment. If you applied $60,000 towards the principal amount on your loan you would now have a balance of $220,313. Recasting the mortgage would reduce your monthly mortgage payments to around $1,394 (about $380 less per month) for the remaining 20 years.
Recasting a mortgage is a possible alternative to re-financing, but it won’t always be the best solution. If your mortgage interest rate is already low then it may make more sense to put the extra cash into an investment with a higher return. You should always do the math to see what makes the most sense for you, or consult a reputable financial professional if you would like to discuss some of these options.
Kevin Warman, CIMA®, RMA®
(Last Updated 4/17/2018)