I Slashed My Mortgage Bill Without Refinancing. Here's How

Not too long ago, I decided I wanted to lower the amount I was paying each month for the mortgage on my home. I wanted a lower monthly payment to improve my debt-to-income ratio because my husband and I will soon be getting a mortgage on a second home and we didn't want our combined mortgage payments to be too high.

I didn't want to refinance my current mortgage to reduce the monthly payments, as mortgage rates are higher now than they were when I took out the loan. But I was able to drop my monthly bills substantially anyway. Here's how I did it.

Recasting my loan made a big difference in my monthly mortgage payments

I was able to reduce the monthly cost of my mortgage by making a lump-sum payment that reduced my principal balance and then asking the lender to re-amortize or recast the loan.

Typically, when you make your monthly mortgage payment, the amount due is the amount of principal and interest necessary to repay your loan in full by the end of the loan period. If you have a fixed-rate loan, the monthly payment you make will be the same the whole time. If you pay it exactly as expected, you will be debt-free on the planned payoff date (usually 15 or 30 years after you took out the loan, depending on your chosen mortgage term).

When you make a large principal payment, though, the amount you have to pay back each month would theoretically be reduced. Since you cut your balance down, you don't need to pay as much each month in order to be debt-free by the agreed upon date.

However, making a big payment doesn't automatically result in your monthly payments dropping to adjust for your new balance. Instead, you typically must continue to pay as promised and you simply end up paying off your loan early.

When you ask your mortgage lender to recast or re-amortize your loan, things work differently. Your lender will recalculate how much you now have to pay each month, given your new lower balance, in order to be debt-free by the deadline. Since your balance is smaller, your monthly payments will be lower.

For example, say you had $120,000 left on a mortgage loan at 4% interest and your current monthly payment was $1,115.43. If you make a $15,000 lump-sum payment and ask your lender to recast your loan (which usually comes with a fee; in this example the fee will be $250), your loan balance would come down to $105,000. Your monthly payment would be reduced to $972.85, saving you about $142.58 per month.

Is recasting right for you?

If you want to lower your monthly mortgage payment without refinancing and you have a lump sum of money you can put toward this goal, recasting can make sense. It's one of very few options you have available to reduce your monthly payment without getting a whole new loan.

But to make this happen, you first need a big sum of cash to put down. My lender wouldn't do the recast unless we paid at least 10% of the outstanding balance. And you'll be tying up more money in your home as well as extending your payoff time. You may decide these downsides are worth it, but don't forget to consider them as you make your choice.