You’re certainly not alone if you’ve never heard of mortgage recasting. After all, mortgage rates have been steadily decreasing since the early 80’s and it’s become a common place to refinance one’s mortgage almost as frequently as we change the oil in our cars! In most cases, refinancing your mortgage makes considerable sense because you can effectively increase cash flow by reducing your monthly mortgage payment, lower the amount of interest you would otherwise pay over the life of your current loan, and potentially shorten the term of the loan from 30 years to 20 or even 15 years.
Most of us would agree the opportunity to refinance your mortgage will soon disappear; however, even if interest rates start to rise, the strategy of recasting your mortgage could still provide some of the same benefits of a refinance, at a fraction of the cost.
Let’s say you receive a large year-end bonus, and you’re not overly excited about investing in the stock market, yet you’d like to do something wise with your extra cash; Consider a mortgage recast. For a relatively small fee (ranging from $50 to $500) you can request that your bank recast the remaining balance on your mortgage after making an eligible lump-sum payment. Most banks classify an eligible lump-sum payment to be the greater of $5,000 or 10 percent of the outstanding loan balance. The number of payments left on the loan remains the same, as do the interest rate, but the amount you must pay each month is recalculated. After recasting, you will have the flexibility of a lower monthly payment, plus the significant benefit of paying much less interest over the remaining life of your loan. The flexibility of a future lower monthly payment is probably most appealing for those considering a recast as you are getting something in exchange for the cash you put forth.
It is important to note not all lenders offer the opportunity to recast, so if you have not refinanced your current mortgage yet and are considering doing so, please make sure the lender will allow future recasting. Also, most banks will not allow a mortgage recast if the borrower is not current on their payments, or they have already recast within the last 12 months.