When a borrower makes a sizable principal payment, the lender may re-amortize the remaining balance over the remaining loan term to reduce the borrower's monthly payment, a process known as mortgage recasting or loan recasting. The borrower's interest rate, loan term, and mortgage payments remain constant. Borrowers who have received a large sum of money unexpectedly, such as an inheritance or a bonus, and would like to utilize it to pay down their mortgage may find mortgage recasting a viable choice. Borrowers can save on interest payments and shorten their mortgage terms by decreasing the principal sum. Costs may be associated with recasting, and not all lenders offer it.

What Is Mortgage Recasting?

By recalculating the loan's parameters and modifying the payment schedule, mortgage recasting enables homeowners to lower their monthly mortgage payments. When a homeowner makes a large payment towards their mortgage, the lender reduces the total interest paid on the loan because less money is being borrowed. Adjusting the loan's principal balance allows borrowers to enjoy lower regular payments.

How Does Mortgage Recasting Work?

Mortgage recasting works by recalculating the loan's terms and adjusting the payment schedule based on the new principal balance. This technique contrasts with refinancing, which includes taking out a new loan to replace the existing one. In contrast,recasting mortgage lets the homeowner keep their current loan while simply adjusting the repayment terms to account for the change in principal.

A homeowner can recast their mortgage by making a large payment towards the principal. These funds can come from various sources, including the homeowner's savings, an inheritance, or a bonus at work, but they are typically rather sizable. After the lump sum is paid, the lender will adjust the mortgage payments to reflect the new principal balance, which will likely be less than before.

Benefits Of Mortgage Recasting:

Mortgage recasting offers various benefits to homeowners, including:

Lower Monthly Payments:

Mortgage recasting's main perk is that it reduces regular mortgage payments. By paying a lump sum towards the principal balance, homeowners can reduce the interest charged over the life of the loan, resulting in lower monthly payments.

Reduced Interest Payments:

Saving money on interest during the loan's lifetime is another perk of mortgage recasting. In the long run, homeowners who pay their principal balance save money by paying less interest.

No Need To Refinance:

Mortgage recasting is an alternative to refinancing in which borrowers cannot obtain new financing. They can keep their current loan and merely readjust their payment terms to account for the change in principal.

Reduced Financial Stress:

Lower monthly mortgage payments can help alleviate financial stress for homeowners, making it simpler to manage their budget and meet other financial responsibilities.

Improved Credit Score:

A homeowner's credit can be helped by recasting their mortgage. Homeowners can boost their credit score by lowering their credit utilization ratio, which measures how much of their available credit they use.

Drawbacks Of Mortgage Recasting:

Although mortgage recasting has many advantages, it is also essential to weigh the disadvantages.

Lump Sum Payment Required:

It might be difficult for homeowners to come up with the large lump sum payment needed for mortgage recasting. Sometimes, homeowners may need to sell off possessions or use their savings to cover the shortfall.

Limited Impact On Interest Rate:

Refinancing a mortgage does not change the monthly payments or the interest rate. Refinancing may be a better option if homeowners want to reduce their interest rate.

Limited Availability:

Mortgage recasting may not be available to all homeowners. Some mortgage companies might not provide this choice, or they might have strict guidelines for qualifying homeowners.

Conclusion

Mortgage recasting can be a valuable strategy for borrowers trying to minimize their monthly mortgage payments and total interest paid over the life of their loan. By making a big payment towards their mortgage principal, borrowers can re-amortize the remaining debt and enjoy lower monthly payments without refinancing or extending their loan term. However, it's essential for borrowers to weigh the potential benefits against any fees associated with recasting and to consider their long-term financial goals. Not all lenders offer recasting, so you must check with your mortgage servicer to see if it's an option for you.