What Are the Disadvantages of Recasting a Home Loan?

Recasting your loan can be an excellent way to lower your loan payments. Instead of doing a refinance, you make a large lump sum payment to your lender, reducing your balance. The lender then re-amortizes your loan over the remaining term with the new balance and your existing rate. For instance, if you had a $300,000 loan at 6 percent interest and you paid it down to $150,000 after the first 10 years, your payment would go from $1,798.65 to $1,074.65.

Recasting Fees

Although this is a minor disadvantage compared with the larger issues inherent in recasting your loan, recasting your loan is rarely free. You can expect your lender to issue a charge to compensate it for its time and the expense in handling the paperwork for recasting. Typical recasting fees vary but usually fall into the hundreds of dollars.

Potentially Higher Payments

Compared with a refinance, recasting your loan will frequently leave you with higher payments. This occurs for a couple of reasons. The first is that your recast loan will carry the rate of your original mortgage. If rates have moved down since you took your mortgage out, you will not be able to benefit from this. The other source of higher payments comes from the fact that a recast will be re-amortized over the remaining term of your loan, while a refinance will restart your amortization process. In other words, if you recast your 30-year loan after 12 years, you pay off the new balance over 18 years. If you refinance, you can pay off the balance over 30 years.

Higher Interest Rates

Even if interest rates have not moved from the time you took out your recast, odds are that you will still pay a higher interest rate if you recast your loan. Typically speaking, the shorter the term of your loan, the lower the interest rate. Recasting, though, gives you a shorter loan term but locks in the rate for the more expensive 30-year term.

Inefficient Use of Money

To recast your loan, you put a large lump sum of money into your house. Is that the best use of your money? Mortgage debt is relatively cheap and is tax deductible. You could also take that money and pay down other high-rate debt that is not tax deductible. You could even save that money in a different investment vehicle which offers higher returns. Before paying your loan down, make sure that you do not have a better use for the money.

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