What is Mortgage Recast?
Mortgage recast is a smart financial strategy used by homeowners. You make a lump sum payment on your loan. The bank recalculates your monthly payment. As a result, your monthly payment is reduced.This process is different from refinancing. In a recast, your interest rate remains the same. The loan term does not change. Only the payment amount is reduced.
Benefits of Recast Mortgage
Reduce financial burden
Reducing monthly payments improves your budget. Extra cash flow can be invested in other investments.
Interest savings
Reducing the principal amount also reduces the total interest. There are significant savings in the long-term.
No Credit Check
There is no credit check for recasting. There is no lengthy approval process like refinancing.
Manual Calculation Method
Step 1: Collect Current Information
• Current loan balance
• Current interest rate
• Remaining loan term
• Lump sum payment amount
Step 2: Calculate New Principal
New Principal = Current Balance – Lump Sum Payment
Step 3: Use Monthly Payment Formula
M = P × [r(1+r)^n] / [(1+r)^n – 1]
Where:
• M = Monthly Payment
• P = New Principal Amount
• r = Monthly Interest Rate (Annual Rate ÷ 12)
• n = Number of Monthly Payments
Step 4: Perform Calculations
These calculations are complex and prone to manual errors.
Easy solution: Use a calculator
Manual calculations are time-consuming and error-prone. Use the Mortgage Recast Calculator to get accurate results.
Practical Example
Ahmed has these mortgage details:
Current Situation:
• Loan Balance: $300,000
• Interest Rate: 5%
• Remaining Term: 25 years
• Monthly Payment: $1,754
Lump Sum Payment: $75,000
Manual Calculation:
1. New Principal: $300,000 – $75,000 = $225,000
2. Monthly Rate: 5% ÷ 12 = 0.004167
3. Number of Payments: 25 × 12 = 300
4. New Monthly Payment: $1,316
Result: Ahmed’s monthly payment will be reduced by $438!
Benefits of using Calculator
Accuracy
Manual calculations are prone to errors. Calculator gives 100% accurate results.
Time Saving
Complex formulas and calculations take time. Calculator gives results in seconds.
Multiple Scenarios
Can test different lump sum amounts. Helps in choosing the best option.
Professional Results
Calculator uses professional-grade formulas. Matches bank calculations.
Best time to recast
Cash Flow Improvement
When you need to reduce monthly expenses.
Interest Rates High
Current market rates are higher than your existing rate.
Long-term Planning
For retirement planning or income reduction.
Investment Opportunities
Require monthly cash flow for other investments.
Using Calculator
Step 1: Gather Information
• View Latest Loan Statement
• Confirm Current Balance
• Check Interest Rate
• Calculate Remaining Term
Step 2: Enter Values in Calculator
• Current Loan Balance
• Interest Rate
• Remaining Term (Years)
• Lump Sum Payment
Step 3: Analyze Results
• View New Monthly Payment
• Calculate Monthly Savings
• Check Total Interest Savings
Important Considerations
Lender Requirements
Each lender has different minimum lump sum requirements. Usually $5,000 to $10,000 minimum.
Recast Fees
Most lenders charge a fee of $150 to $500.
Tax Implications
Interest deduction is reduced because monthly interest is reduced.
Emergency Fund
Maintain an emergency fund before making a lump sum payment.
Alternative Options
Extra Principal Payments
You can make extra principal payments on a regular basis.
Bi-weekly Payments
Make bi-weekly payments instead of monthly.
Refinancing
Consider refinancing if interest rates are significantly lower.