Deciding between recasting your mortgage and simply paying down principal depends on your financial goals and current situation. Generally, recasting is beneficial if you have a large sum of cash and want to lower your monthly payments while keeping your current interest rate, whereas paying down principal is a straightforward way to save on interest and shorten your loan term without formal changes to your mortgage agreement.
What is Mortgage Recasting?
Mortgage recasting, sometimes called a loan modification or re-amortization, allows homeowners to make a large lump-sum payment towards their principal balance. After this payment, the lender recalculates your monthly payments based on the new, lower principal balance, but typically keeps the original interest rate and remaining loan term. This results in a reduced monthly payment without the need for a full refinance.
Key Aspects of Recasting:
- Lump-Sum Payment: Requires a significant one-time payment.
- Reduced Monthly Payments: Your primary benefit is a lower monthly obligation.
- Interest Rate Stays the Same: You retain your current interest rate, which is ideal if you have a favorable rate.
- Loan Term Remains: The original payoff date of your mortgage usually doesn't change, although with lower payments, you'll still pay off the remaining balance by the original end date.
- No New Loan: It's an adjustment to your existing loan, not a new mortgage, meaning less paperwork and lower fees compared to refinancing.
What is Paying Down Principal?
Paying down principal simply means making extra payments directly towards the outstanding balance of your mortgage, beyond your scheduled monthly payment. This can be done regularly (e.g., adding an extra $100 each month) or sporadically when you have extra funds.
Key Aspects of Paying Down Principal:
- Direct Principal Reduction: Every extra dollar goes straight to reducing your loan balance.
- Interest Savings: Since interest is calculated on the principal balance, reducing the principal means you pay less interest over the life of the loan.
- Shortened Loan Term: By consistently paying extra, you can pay off your mortgage much faster than the original term.
- No Formal Process: You typically don't need to involve your lender beyond ensuring your extra payments are correctly applied to the principal.
- No Change to Monthly Payments: Your minimum required monthly payment remains the same, although you have the flexibility to pay more.
Recasting vs. Paying Down Principal: A Comparison
Here's a breakdown to help you understand the differences between these two approaches:
| Feature | Mortgage Recasting | Paying Down Principal (without recasting) |
|---|---|---|
| Primary Goal | Lower monthly mortgage payment | Save interest, shorten loan term |
| Payment Type | Requires a substantial lump-sum payment | Can be small, regular extra payments or lump sums |
| Interest Rate | Stays the same | Stays the same |
| Monthly Payment | Decreases after the recast | Stays the same (minimum), but you pay more voluntarily |
| Loan Term | Typically remains the same | Shortens over time with consistent extra payments |
| Formal Process | Yes, requires lender application and approval | No, just extra payments to your lender |
| Cost/Fees | Typically low administrative fee ($250-$500) | No direct fees |
| Ideal For | Homeowners with a large windfall wanting lower payments and a good existing rate | Anyone wanting to save interest and pay off faster |
When to Choose Recasting
Recasting is a powerful tool under specific circumstances:
- You've received a significant lump sum: This could be from a bonus, inheritance, the sale of a previous home, or other windfalls.
- You want to reduce your monthly expenses: If your budget is tight and a lower monthly mortgage payment would provide significant relief, recasting is ideal.
- You have an excellent current interest rate: If your mortgage rate is lower than current market rates, recasting allows you to keep that favorable rate while benefiting from a reduced payment. It's often "best for homeowners who want to keep their current interest rate and have the cash to make a substantial lump-sum payment."
- You want to avoid the complexities and costs of refinancing: Recasting is much simpler and cheaper than a full mortgage refinance.
Example: Sarah inherits $50,000. Her current mortgage interest rate is 3.5%, which is very good. She uses the $50,000 to recast her mortgage. Her monthly payments drop by $300, making her budget much more comfortable, and she retains her low 3.5% rate.
When to Choose Paying Down Principal (Without Recasting)
Simply paying down your principal is often the preferred strategy for many:
- Your primary goal is to save on interest and pay off the loan faster: Every extra dollar directly reduces the amount on which interest is calculated, significantly cutting down your total interest paid over the life of the loan.
- You don't have a large lump sum but can make smaller, regular extra payments: You can chip away at your mortgage balance without needing a massive upfront payment. Even an extra $50 or $100 per month can make a substantial difference over time.
- You want maximum flexibility: There's no formal process or commitment; you pay extra when you can.
- You prioritize building equity more rapidly: Extra principal payments directly increase your home equity.
Example: Mark decides to pay an extra $200 towards his principal each month. While his minimum payment doesn't change, this consistent effort will save him tens of thousands of dollars in interest and allow him to pay off his 30-year mortgage several years early.
When Refinancing is the Better Option
It's important to distinguish both recasting and paying down principal from refinancing. If your main goal is to secure a lower interest rate than your current one, take cash out of your home equity, or both, then refinancing is the better route. Refinancing involves taking out a brand-new mortgage, which replaces your old one and comes with closing costs, but can offer significant long-term savings or access to home equity.
Conclusion
Neither recasting nor simply paying down principal is inherently "better" than the other; the optimal choice depends on your specific financial objectives. If you have a substantial sum of money and your priority is to lower your monthly payment while retaining your existing interest rate, recasting is an excellent choice. If your focus is on saving the most interest and paying off your mortgage as quickly as possible, either through lump sums or consistent smaller extra payments, then simply paying down principal is highly effective. Always consider your current interest rate and whether a full refinance might offer even greater benefits if market rates are significantly lower.
