If you bought a home during a period of high-interest rates, it’s smart to consider either refinancing your mortgage or opting for a recast, especially as rates have been dropping since their peak in 2022. This could lead to significantly lower monthly payments for many homeowners.
Here’s why I’ve been a fan of adjustable-rate mortgages (ARMs) and why they might be a smart choice. Since 2003, I’ve refinanced my mortgage whenever rates dropped by at least 0.5%. But with high rates lingering, more people might find recasting a practical option.
What is a mortgage loan recast?
A mortgage recast lets you reduce your monthly payments by making a one-time, large payment towards your loan’s principal. This amount is typically at least $5,000, depending on your lender. A recast adjusts your payment schedule based on a reduced principal but keeps your interest rate and loan term the same. The process usually involves a small fee, much lower than the costs associated with refinancing.
Example of a mortgage recast:
Consider a $1,000,000 30-year fixed mortgage at a 6.5% interest rate. If, after five years, you make a $200,000 payment towards the principal, your loan amount would drop to $738,387.38. This adjustment would decrease your monthly payment from $6,320.37 to $5,148.92, saving you around $1,171.45 a month.
Advantages of recasting over refinancing:
1. Reduced payment: You lower your monthly payments without needing a credit check or an appraisal, which are typically required for refinancing.
2. Simplicity and cost: Recasting is straightforward and usually cheaper than refinancing since you don’t start a new loan term.
Disadvantages:
1. High upfront cost: You need a substantial amount of cash to make it worthwhile.
2. Fixed interest rate: Your rate remains the same, which might be less ideal in a declining rate environment.
For those with a strong cash flow, opting for an ARM might be more beneficial. ARMs can adjust to a lower rate without any recasting fees, allowing flexibility to make principal payments at your discretion, potentially lowering your payments further.
Have you considered recasting or refinancing your mortgage? These options can provide significant financial relief by reducing your monthly payments, but they require careful consideration to ensure they fit your financial situation. If you’re exploring mortgage options, it’s wise to compare the benefits of recasting versus refinancing to choose the best strategy for your needs.
