August 14, 2024

Mortgage rates have gone up 4-5% over the last 2 years. This has led many to change their stance on paying off their mortgage faster.

If this is you and you are making a lump sum investment, you need to learn about mortgage recasting.

Simple put, it’s when you make a lump-sum payment towards your mortgage. You then have your lender re amortize your mortgage with a new, lower balance

The best part, you get to keep the interest rate and term, but you lower your monthly payments. Most people have no idea this is even an option. They choose to pay double the payment, throw down their bonus, etc. but then don’t recast it.

**Why is recasting so helpful?**

It lowers your monthly payment giving you even more flexibility down the line However… this does not mean you need to start paying that lower amount. You can still accelerate your loan if you want.

It generally works like this:

**Step 1: You make a large lump sum payment of about $10,000 or more **

Sometimes this can be less, but generally it is around that number. This money then goes to lowering your balance. If you put down $50k and owed $400k, you would now only owe $350k. It all goes to principle which makes a huge difference.

**Step 2: The lender reamortizes your balance **

If you do not know what amortizing means, its basically how the loan is paid down with a mix of interest and principal. With mortgages, you pay way more in interest at first because the loan amount is the way higher in the beginning. The more you pay down, the less interest there is since the balance is lower.

So once you make this lump sum payment, you have the lender adjust the repayment schedule based on the amount that is leftover. This is why the monthly payment goes down.

**Step 3: You pay the fee**

More times than not you are going to pay some fee for doing this. I generally have seen it around $250. This can be well worth it as it can reduce your payment quite a bit.

Think of the example above with a $50k payment.

If you just started a mortgage that has $500k on it at 7% interest, then this year your payment would be $3,326 and **$31,949.51 would go to interest. **

****If you then paid $50k in December**, your loan balance would now be $446,000. **Your payment would be under $2,991 and you would save about $67k of interest on your loan. This is a nice change.

**So how do you qualify for recasting?**

- You cannot have government backed loan
- You must pay the minimum amount required - usually $10k
- You must have enough equity to do this. This differs at each place
- You must have made enough on time payments to qualify

This can be an awesome strategy for those with lots of extra funds and a high interest rate on their mortgage.

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Thomas Kopelman

Financial Advisor