You may have heard that you can lower your monthly mortgage payment without refinancing via a “mortgage recast.”
These two financial tools are quite different, which I’ll explain, but let’s first discuss recasting to get a better understanding of how it works.
In short, a mortgage recast takes your remaining mortgage balance and divides it by the remaining months of the mortgage term to adjust the monthly payment downwards (or upwards). Let’s focus on the downward portion for now.
The downside to mortgages is that the monthly payment doesn’t drop if the balance is paid faster. That’s right, even if you pay more than necessary, you’ll still owe the same amount each month because of the way mortgages are calculated.
So if you made biweekly payments for a period of time, or contributed one big lump sum payment after some sort of windfall, you’d still be forced to make the original monthly payment until the loan was paid in full.
In this case, you could benefit from recasting your mortgage to a lower monthly payment.
Original loan amount: $250,000
Original monthly payment: $1,193.54
Balance after five years: $226,000
Lump sum payment: $51,000
New loan balance: $175,000 (lower but payment doesn’t change without a recast)
Let’s assume you started out with a $250,000 loan amount on a 30-year fixed mortgage set at 4%. The monthly payment would be $1,193.54.
Now let’s pretend after five years you came upon some cash and decided to pay the mortgage balance down to $175,000, despite the amortization of the loan dictating a balance of around $226,000 after 60 payments.
As mentioned, the monthly payment wouldn’t change just because you made an extra payment. Although you owe a lot less than scheduled, you’d still be on the hook for $1,193.54 per month with the $175,000 balance.
The upside is that the mortgage would be paid off way ahead of schedule because those fixed monthly payments would satisfy the lower balance before the term ended.
But suppose you’d like to get your remaining monthly payments lowered to reflect the smaller outstanding balance. That’s where the mortgage recast comes into play.