Last month, when the Mega Millions jackpot rose to nearly $1.6 billion, quite a few of us probably thought about how that money might change our lives. We might have considered how we would be able to quit our jobs or give large amounts to charities, family members and friends. Or we might have thought about how we could use it toward a new or existing house.
The reality, though, is that the chance of any one of us winning the lottery (at least the Mega Millions one) is only 1 in 302,575,350, and those are some pretty lousy odds. But while we might not ever cash in a winning ticket, we just might inherit a bit from a family member or score an extra bonus one year at work. We wouldn’t be able to quit our day jobs or give three million to our parents, but we could put that money toward our homes. After all, a lower monthly payment is always appealing!
But before taking a big lump sum and refinancing, consider the lesser-known mortgage recast option:
The Gist of the Mortgage Recast
A mortgage recast is when a borrower makes a large payment (typically more than $5,000) toward his or her loan’s balance (also called its principal).
However, as opposed to refinancing, where you have to buy a whole new loan, recasting only changes the amortization schedule, with your lender recalculating loan payments based on the new lower principal amount. Your existing loan conditions, including your interest rate, remain the same, but your monthly payments are reduced.
Why Recasting Can Be a Better Option Than Refinancing
Assuming you have a low interest, fixed-rate, conventional mortgage (not a VA or FHA loan), a recast allows you to lower your monthly payments while keeping the same beneficial terms of your loan.
With a refinance, you are guaranteed neither approval for a new loan nor a better interest rate. Plus, refinancing is expensive, with fees that can quickly climb to the thousands of dollars when application, appraisal, title, insurance and other closing costs are added to the bottom line.
Compare that to recasting, which is typically no more than a few hundred dollars since all your lender has to do is add your payment to the principal and readjust your payment schedule.
When Recasting Doesn’t Make Sense
Of course, not everyone should consider recasting a mortgage. If you have other substantial debt or want to keep an adequate reserve for emergencies, tying up your extra cash in your home’s equity might not make sense.
Similarly, if you want to reduce the length of your mortgage, recasting it won’t help. Talking to a professional, much like you would a doctor for medical issues or an H-1B lawyer for immigration concerns, can help you better understand your options and make the best decision for your financial well-being.