Looking at a Mortgage Recast

Dear Dr. Don,
I have heard of something called a recast on a home mortgage loan. I believe it is paying off a large chunk of the mortgage and having the taxes and remaining balance recalculated to a lower payment. What I don't know is if the length in years of the mortgage stays the same or if you can change the amount of years to pay off the debt. Have you any advice on this subject?
Thank you,
-- Bewildered Barb

Dear Barb,
Recasting a mortgage loan typically comes up in one of three contexts. The first is when a homeowner wants to pay down principal and have the loan reamortized. That's the type of recasting you're talking about.

The second is when a homeowner is in financial distress and wants to extend the term of the loan to reduce the monthly payment. Finally, a negative amortization loan is typically recast to a larger monthly payment after the loan balance has increased by a set percentage, or at a time certain, so the loan will amortize over its remaining loan term. The balance of my reply will focus on the type of mortgage recast you're asking about, namely paying down the loan to resize the monthly mortgage payment.

An amortized loan sizes the fixed monthly loan payment so at the end of the loan, the principal balance is paid off. Bankrate's Mortgage Payment Calculator also has an amortization schedule that shows how the monthly payments break down between interest expense and the repayment of principal.

The typical homeowner doesn't recast their mortgage when they make additional principal payments. Instead the loan is foreshortened because the additional principal payments have reduced the outstanding loan balance, along with the monthly interest expense. The monthly payment doesn't change, so the loan is paid off sooner. You can also use Bankrate's Mortgage Payment Calculator to see how additional principal payments reduce the total interest expense and shorten the loan term.

Occasionally the homeowner's goal in making an additional principal payment isn't to shorten the loan, but to reduce the monthly mortgage payment. For that to happen, the loan has to be recast. The lender will base the mortgage payment on the new, lower loan balance and the remaining term of the loan. You can use Bankrate's mortgage payment calculator to determine the recast payment as well.

Not all lenders offer customers the ability to recast their mortgage. Originating lenders often sell the loans they originate to investors. The investors aren't willing to provide that level of flexibility to borrowers, so the loans can't be recast. Talk to your lender about recasting your mortgage.

In general, the recast option will be to size the monthly payment over the remaining loan term at your current interest rate. Recasting the loan shouldn't have an impact on escrow payments for taxes and insurance unless the new loan-to-value gives you the right to opt out of paying these expenses through an escrow account.

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