During the pandemic years of 2020 to 2021, millions of Americans refinanced their mortgages or bought properties with mortgage rates well below historical averages thanks to the Federal Reserve’s extremely loose monetary policies. Metro Phoenix rode that boom harder than most markets. A large share of Arizona homeowners locked their loans while money was cheap during those years.
Many of them were retirees and snowbirds who made the Valley their permanent home and locked in monthly payments they could not come close to matching today.
According to Redfin, more than half of homeowners with a mortgage are paying rates below 4%. If you are part of this lucky group, you are holding something genuinely valuable. At the same time, you are to some extent stuck with the home you are in and the mortgage you have. It is economically unattractive to downsize, or pay a lump sum and refinance to reduce your monthly payment. The usual move for reducing your monthly payment is no longer working. The moment you refinance, your rate will jump by 2 to 3 percentage points, eliminating all the benefits of paying down your mortgage or extending the life of the loan, and in many cases it could even have the opposite effect, increasing your monthly payment.
With the standard tool for cutting your monthly payment no longer working, there is still another way to bring your monthly payment down, while keeping your mortgage rate. There is a little-known financial product called mortgage recasting that most homeowners have never heard of. If your mortgage qualifies for recasting, this is the best vehicle for reducing your monthly payment.
First Step Is To Find Out If Your Mortgage Is Eligible
While recasting is not available on all loans, the good news is most conventional mortgages are eligible, and conventional loans make up roughly three out of four new mortgages in the US. Loans that are not usually covered include FHA, VA, USDA, and other government-backed programs.
Even with conventional loans, the company that services the loan still has to agree because recasting is not something regulation mandates, and is merely a courtesy most lenders choose to offer. That said, this is not a service they advertise, and a recast earns the servicer far less than a refinance, so it is usually on you to bring it up.
If mortgage recasting is something you want to consider, your first step is a phone call. Ask the company servicing your loan two questions: will you recast my loan, and what are the fees and conditions if any. For loans that are eligible, the process involves a modest fee typically under $500 and in most cases it does not require new appraisals or credit checks.
What a Recast Does to Your Mortgage Payment
The mechanics of recasting your mortgage are fairly simple. You pay a lump sum to your lender, reducing the principal you owe. The lender then re-amortizes the loan, which means it recalculates your monthly payment based on the new balance you owe over the remaining term of the loan.
For example, assume you bought a house 5 years ago for $500K, putting 20% down, and financed the rest at 4% on a 30-year fixed loan. Your mortgage payment is roughly $1,910 per month.
After five years, you still owe about $362,000 to the bank. If you pay the bank an additional $100K, and recast your mortgage, your monthly payment goes down to about $1,382, a saving of $528 per month. The $100K principal reduction also means you pay about $58,000 less in interest over the remaining life of the loan.
Recasting helps reduce your monthly payment without changing your interest rate or length of the loan. Arcanomy has built a simple mortgage recast calculator to help you analyze your specific situation and calculate how much you can save monthly by recasting your mortgage.
Recast or Pay Down the Balance: The Real Tradeoff
When you are paying down your mortgage, you have two options. The first option: you can just submit the payment, reduce the principal you owe to the lender, which in turn reduces the length of the loan without impacting the monthly payment. This option typically does not require any approval process, assuming your mortgage does not come with a prepayment penalty. This is mostly the case for almost all loans issued recently. You should still check with your lender to be absolutely sure.
The second option is the mortgage recasting option we discussed earlier, where you reduce your monthly payment but the loan ends on its original schedule.
Comparing the two options on the example we discussed, for a mortgage balance of $362,000, with 25 years remaining on the loan, paying a $100K lump sum for option 1 reduces the remaining life of the loan from 25 years to about 15 years while keeping the monthly mortgage payment the same at $1,910. Total interest paid in option two for the remaining 25 years is about $153,000 while for option 1, the interest paid is about $89,000, roughly $64,000 lower.
Recasting helps your monthly cash flow by putting an extra $528 in your pocket, while keeping the monthly payment the same helps you own the house free and clear almost 10 years sooner.
For people on fixed income, mortgage recasting is an effective way to reduce your monthly financial burden, leaving more money to spend on other daily life expenses. One warning: do not hand over a lump sum that leaves you short on savings you might need.
When a Recast Is Not the Right Move
A recast is not for everyone. If your goal is to be debt-free as quickly as possible, paying the lump sum toward principal without recasting gets you there faster and saves more interest. If your current rate is high enough that today’s market would actually beat it, a refinance may be worth the cost despite the rate reset. And if your loan is government-backed, recasting likely is not on the table at all.
See the Numbers Before You Decide
Deciding whether mortgage recasting is the right option for you comes down to deciding whether the extra monthly saving on your mortgage is worth the lump sum that produces it. Depending on your situation, putting down an annual bonus you received to reduce your monthly payment instead of blowing it on a new car could improve your family finances, reduce your stress, and help you deal with other expenses and inflation. This helps you have one of the household expense line items experience deflation for a change.
Keeping a low rate and lowering the payment usually feel like a choice between two good things. A recast is the rare case where you do not have to choose.
