Many lenders will tell you the only way to reduce your payment on your loan is to refinance even if you have a large sum of money to put down. That’s not always the case however. On conventional mortgages and some other loans, there is an option to do what’s called a mortgage recast (also known as re-amortization).
How Does a Mortgage Recast Work?
Typically, in order to do a mortgage recast, you’ll need to be putting at least $10,000 extra towards your loan balance (some lenders allow less) in a pay down. You’ll want to reach out to the lender PRIOR to paying down your loan to ensure it gets paid as a recast (and not just a large principal reduction – which will help reduce your interest paid on the loan, but not your monthly payment). Lenders are allowed to charge a reasonable processing fee in order to do this. Typically, this fee is $100-$300 depending on the lender and they’ll give you instruction on how to make the payment + fee payment prior to you sending.
When Does a Mortgage Recast Make Sense?
If you already got a great rate on your current loan but want to apply an additional payment on your loan and want the payment to be lower in the future, this can be great. We see this often with clients that bought a home before they sold their current one; and have their sale profits that they’d like to apply to their mortgage. We also see this sometimes at retirement, when people get inheritance, severance packages, sell other investments, etc. Any time someone has a large sum they’d like to apply towards their balance and also reduce their minimum mortgage payment moving forward.
When Does it Not Make Sense?
If rates are lower at the time of wanting to make the additional payment, sometimes a refinance may make more sense (avoid the recast fee and technically a refinance may be cheaper especially if you’re dropping your rate). A refinance may also make sense if you don’t need to drop your payment, even if rates have gone up a bit. For example (not live rates), if someone got an initial 30yr mortgage at 4%, but now has a large sum that they now feel comfortable with a 15yr, they may refinance into a 15yr mortgage at 3.5%.