Can I lower my mortgage payment without refinancing?
So, you’re stuck with a high monthly mortgage payment. But you’d rather not refinance and pay thousands in closing costs.
How can you lower your monthly mortgage payment without refinancing?
One option may be a mortgage recast.
Recasting lets you reduce your monthly bill, and usually only costs a few hundred dollars in lender fees.
The catch? You’ll need a large cash sum you can put toward your mortgage right now to lower the balance. Here’s how a mortgage recast works.
Mortgage recast explained
A mortgage recast is a way to lower your monthly mortgage payment. It involves paying a one-time lump sum toward your loan’s principal amount. In turn, your lender alters your amortization schedule. This resets your monthly payments without changing your original loan terms or interest rate.
Mortgage recasting is also known as “re-amortization.”
Your lump sum payment decreases your principal, resulting in slightly lower monthly payments. Plus, you pay less toward interest throughout your loan.
Mortgage recast rules
A mortgage recast can be cheaper and easier than refinancing. But there are still rules and fees associated with a mortgage recast. And these vary by lender. For example:
- The lender may charge you a fee of a few hundred dollars for this service
- You might have to make a certain number of monthly payments in a row at your current payment amount prior to recasting
- Paying off your principal by a minimum amount may be required before recasting
Furthermore, the recasting process can take a few weeks to complete. And adjustable-rate, interest-only, and other types of loans may not qualify for recasting.
Why mortgage recasting is worth it
Crunch the numbers and you’ll quickly see how recasting pays off.
For example, say your original loan looks like this:
Current mortgage balance and payments
- Balance: $300,000
- Interest rate: 4%
- Monthly payment: $1,430
- Total interest over life of loan: $215,600
Now, imagine if you had an extra $40,000 saved up. You put it toward your principal via a recast and pay your lender a $200 recast fee.
Your re-amortized loan would look something like this:
New balance and payments with mortgage recast
- Balance: $260,000
- Interest rate: 4%
- Monthly payment: $1,240
- Monthly savings: $190
- Total interest over life of loan: $187,050
- Interest savings: $28,550
Your interest rate, mortgage term, lender, and payment method didn’t change.
But your monthly mortgage bill dropped significantly. And much less of your hard-earned money will have gone toward interest when all is said and done.
Mortgage recast pros and cons
|- Lower your monthly payment
- Low up-front cost (a few hundred)
- Pay a lot less interest over the life of the loan
-No credit or income re-check
|- Cannot lower your interest rate
- Need a large lump-sum payment to be worth it
- Not all lenders allow recasting
When to consider a mortgage recast
Joseph Polakovic is owner and CEO of Castle West Financial. He says many borrowers are good candidates for recasting.
“This strategy makes sense for those who want to keep some liquidity and keep their current low interest rate while also lowering their monthly payment obligation,” he notes.
“These borrowers likely fall into the conservative investor category,” adds Polakovic.
“Their investments aren’t earning as much as their mortgage interest rate, so they are choosing to partially lower their monthly payment and liability without compromising their liquidity.”
Leslie Shull is an assistant professor of real estate at Sacramento City College. She says a mortgage recast is a smart tactic for other people, too.
“In my experience, people who chose to do a recast had recently inherited a large sum of money. Or they were getting ready to retire in five to 10 years and were paying down their mortgage to get their ducks in a row,” explains Shull.
“They had an interest rate that was better than current rates. So refinancing didn’t make sense. By paying down the principal loan amount, these folks get to keep their same great rate and have a lower payment.”
Drawbacks to recasting your mortgage
Finance expert Chane Steiner, CEO of Crediful, says there’s a downside to recasting for some.
“If you currently have a high interest rate, you’ll keep that same rate.”
Also, not every lender offers recasting. And you may not qualify, depending on your lender’s rules.
“Make sure your lender is willing to do this. Banks are more likely to, while certain government loans are less likely to,” says Steiner.
No income or credit re-check
Fortunately, adds Steiner, “you don’t need to worry about providing proof of income or checking your credit score,” Steiner adds.
“You’re already approved for the loan; you’re just negotiating new payoff terms for the loan by paying more now.”
Refinancing and extra payments: Alternatives to a mortgage recast
Recasting isn’t the only way to lower your payment or put your extra money to work. Instead, consider a mortgage refinance.
“Refinancing might offer you a better deal if you can lower your interest rate,” Steiner suggests.
“A mortgage refinance can lower your monthly payment at the cost of extending your loan and possibly repaying more money overall.”
But usually refinancing involves more expensive fees, scrutiny of your credit, and paperwork.
Alternatively, look into making accelerated mortgage payments — also called prepaying your mortgage.
Like a mortgage recast, this move helps reduce the total interest you’ll pay over the life of your loan. And you don’t have to come up with a hefty lump sum one-time payment. The drawback here is that your payment doesn't go down.
Lastly, consider investing that lump sum money instead.
You may be able to earn a higher rate of interest in stocks, bonds, or other securities.
The risk is that your rate of return isn’t guaranteed – you may lose money when investing.
Could you reduce your mortgage payments?
If you have a big chunk of cash saved up, you might want to recast your mortgage to lower your monthly payments.
In that case, talk with your current lender to see whether recasting is an option.
If you don't have a lot of expendable cash, you might consider refinancing instead.
A refinance still requires closing costs, but you can roll those into the loan amount.
And lowering your interest rate could have an even bigger impact on your long-term costs than recasting, depending on your current rate.