Does Recasting a Mortgage Change the Interest Rate?

Mortgage recasting offers homeowners a method to adjust their mortgage payments without a complete loan refinance. This process can be a strategic financial move for those with a significant sum of money who wish to reduce their ongoing mortgage obligations. It provides an alternative to refinancing, which involves securing an entirely new loan.

Understanding Mortgage Recasting

Mortgage recasting involves making a substantial one-time payment directly to the principal balance of an existing home loan. After this lump-sum payment, the lender recalculates the monthly mortgage payments based on the new, reduced principal amount. The original loan term remains unchanged, meaning the borrower continues to pay off the loan over the same number of years. This recalculation, known as re-amortization, results in lower monthly payments because a smaller principal balance is being spread over the remaining original loan duration. This differs from refinancing, which replaces the existing mortgage with a new loan, potentially altering the interest rate, term, and incurring new closing costs.

The purpose of the lump-sum payment is to significantly reduce the outstanding principal. For example, if a homeowner has a $300,000 balance and makes a $50,000 principal payment, the new balance for amortization becomes $250,000. The lender then adjusts the payment schedule so that the remaining $250,000 is paid off by the original end date of the loan. This adjustment leads to a decreased monthly payment without extending the overall repayment period.

Interest Rate Impact of Recasting

Recasting does not change the interest rate of the existing loan. The interest rate agreed upon when the mortgage was originally originated remains in effect. This is because recasting is a re-amortization of the current loan, rather than the creation of a new one.

In contrast, refinancing involves obtaining a new mortgage, which would come with a new interest rate, potentially lower or higher depending on current market conditions. Therefore, homeowners seeking a lower interest rate would need to explore refinancing options instead of recasting.

Financial Implications and Suitability of Recasting

The financial outcome of recasting is a reduction in the monthly mortgage payment. By applying a large lump sum to the principal, the amount on which interest is calculated decreases immediately. While the interest rate remains constant, the total amount of interest paid over the life of the loan will be less because the loan’s principal is paid down more quickly. This can free up cash flow in a household’s monthly budget, providing financial flexibility.

Recasting is suitable for homeowners who receive a significant sum of money, such as an inheritance, a substantial work bonus, or proceeds from the sale of a previous home. It allows them to leverage these funds to reduce their ongoing housing expenses without incurring the higher costs associated with refinancing. This strategy is also appealing to those who want to reduce their monthly debt obligations, potentially improving their debt-to-income ratio without extending their loan term.

The Recasting Process

Initiating a mortgage recast begins by contacting the current loan servicer to inquire about their specific recasting policies. Not all lenders offer this option, and eligibility requirements can vary. Common requirements include making a minimum lump-sum payment, which can range from $5,000 to $10,000 or more, and having a conventional loan, as government-backed loans like FHA, VA, or USDA mortgages are ineligible.

Once eligibility is confirmed, the borrower will submit the required lump-sum payment and any associated fees. Lenders charge a processing fee for recasting, which is a few hundred dollars, between $150 and $500. After the payment is applied, the lender recalculates the amortization schedule, and the new, lower monthly payments will take effect. The processing time for a recast is quicker than a refinance, taking a few weeks to complete.