How is Recasting a Mortgage Calculated?

Mortgage recasting can be a powerful financial tool to lower your monthly payments without refinancing your loan. But how exactly does the process work? Below is a step-by-step breakdown of how mortgage recasting is calculated.

1. Determine Your Current Loan Balance

The first step in the recasting process is understanding your current loan balance—the amount you still owe on your mortgage before making any lump-sum payments. This figure can be found on your latest mortgage statement or by contacting your loan servicer.

For example, let’s say your remaining balance is $250,000.

2. Make a Lump-Sum Payment

The key to recasting is making a lump-sum payment toward your principal. Most lenders require a minimum lump-sum payment, typically between $5,000 and $10,000. This amount directly reduces the outstanding balance on your mortgage.

In this scenario, let’s assume you decide to make a lump-sum payment of $50,000.

3. Subtract the Lump-Sum Payment from the Principal

Next, subtract the lump-sum payment from your remaining loan balance to get your new loan balance.

New Principal Balance = Original Balance − Lump-Sum Payment

Using the numbers from our example:

New Principal Balance = $250,000 − $50,000 = $200,000

4. Determine Your Remaining Loan Term

The term of your loan—how many months you have left—stays the same when you recast your mortgage. This means that the only thing that changes is your loan balance, not the length of time you have to pay it off.

Let’s assume you have 240 months (20 years) remaining on your mortgage.

5. Recalculate the Monthly Payment

Your lender will recalculate your monthly payment by dividing the new principal balance by the number of months remaining in your loan term. They also take the interest rate into account, but this rate remains unchanged from your original loan.

The formula used to recalculate the monthly payment with the fixed interest rate is based on amortization, which adjusts both the principal and interest components of the monthly payments.

Here’s the basic structure of the calculation:

Monthly Payment = (New Principal Balance × Interest Rate Factor) / (1 - (1 + Interest Rate Factor)^(-Months Left))

Let’s assume your loan has a fixed interest rate of 5%. In this example, the new monthly payment will be lower than before because the principal balance has been reduced.

Example Using the Formula:

Let's assume the following values based on an example:

• New Principal Balance: $200,000
• Interest Rate Factor: 0.004167 (this corresponds to a 5% annual interest rate divided by 12 months)
• Months Left: 240 months (20 years remaining on the loan)

Formula:

Monthly Payment = (New Principal Balance × Interest Rate Factor) / (1 - (1 + Interest Rate Factor)^(-Months Left))

Substituting the values:

Monthly Payment = (200,000 × 0.004167) / (1 - (1 + 0.004167)^(-240))

Step-by-Step Calculation:

1. Calculate the numerator: 200,000 × 0.004167 = 833.4

2. Calculate the denominator:

   • Add 1 to the Interest Rate Factor:
     (1 + 0.004167) = 1.004167

   • Raise this result to the power of -240 (the negative number of months left):
     1.004167^(-240) ≈ 0.35849

   • Subtract this result from 1:
     1 - 0.35849 = 0.64151

3. Divide the numerator by the denominator: 833.4 / 0.64151 ≈ 1,298.45

Final Result:

The monthly payment would be approximately $1,298.45.

6. Compare the Old and New Payments

If your original monthly payment was based on a $250,000 balance, your new payment will now reflect the $200,000 balance. Though the exact numbers depend on the interest rate and remaining term, you’ll find that the recalculated monthly payment is lower due to the reduced principal.

Example Summary:

• Original Loan Balance: $250,000
• Lump-Sum Payment: $50,000
• New Loan Balance: $200,000
• Remaining Term: 240 months (20 years)
• Interest Rate: 5%

Using these values, your new monthly payment would be approximately $1,298.45, based on a 5% interest rate and a remaining term of 240 months. This is significantly lower than the original payment calculated on the $250,000 balance.

7. Final Monthly Payment

After recalculating, your new monthly payment will be significantly reduced, helping to free up more of your income for other expenses or savings, without affecting your interest rate or extending the term.

This is the basic process of how a mortgage recast is calculated, helping you save on monthly payments while maintaining the same loan structure.