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So, you have a large mortgage payment. But you don’t want to refinance and pay thousands of dollars in fees. One of the best ways to reduce your mortgage payments without refinancing is by doing what is known as Mortgage Recast.
Mortgage recasting lowers your average monthly mortgage paymentsand only costs a few hundred dollars in lender fees. This article will go over what it is, qualification requirements, pros and cons, and the differences between mortgage recast and refinancing.
What Is a Mortgage Recast?
A mortgage recast is when an individual borrower makes a large, lump-sum payment towards their mortgage principal and the mortgage lender reamortizes the loan. This reduces your loan to reflect the new balance.
Typically, recastingreduces the monthly mortgage paymentsand interest you’ll have to pay over the loan’s term. However, it does not change your interest rate or loan terms.
Mortgage recasting offers several attractive benefits to homeowners having extra funds to pay down their loan balance:
- Payless in monthly mortgage payments.
- Less interest payments over the loan’s life.
- Your low-interest rate will remain unchanged. (Recasting won’t assist if your interest rate is high.)
How Do You Recast Your Mortgage?
If you’re thinking about a mortgage recast, here are a few steps on how to go about it successfully.
Notify your lender
Mortgage recasts are not usually advertised. Some lenders don’t allow recasting, while others may make you an offer if you pay a portion of the mortgage balance. Online mortgage lenders may additionally levy a $200-$500 recasting cost, which is usually recouped within a few months of payments. More importantly, your lender will inform you whether your type of loan qualifies for a mortgage recast.
Pay a lump payment
Once the lender approves, you’ll make a lump payment on your mortgage. The larger the lump sum payment for mortgage recasting, the lower the monthly payment. Some lenders need a minimum lump sum payment between $5,000 to $10,000.
Adopt a new repayment plan
A mortgage recast amortizes the loan. The lender will recalculate your monthly payments based on your new loan balance. Most often, you’ll pay less. You’ll also pay less interest over time, even if your rate doesn’t. Keep making your regular mortgage payments until your account shows the new payment amount.
How Do I Qualify for Mortgage Recasting?
Before sending a letter to your mortgage lender, you must note that not all lenders and mortgage loan programs allow mortgage recasting. But if your lender and loan programs allow for mortgage recasting, below is what you need to qualify for one:
You can’t have a government loan.
Current FHA, USDA, and VA home loanrestrictions prohibit mortgage recasting. Most jumbo loans are also not recastable.
If you want to change the terms of these mortgages, you’ll need to do a mortgage refinancing.
You must achieve minimum principal reduction.
Most lenders require a minimum of $5,000, but it can potentially be a percentage of your principal. Before going ahead with your mortgage recasting plan, you must find out the minimum lump sum payment required of you by your mortgage lender.
You must have equity.
A recast may require a certain amount of equity in your loan. It can be a set amount or a percentage of your principal debt. To qualify for a recast with some mortgage companies, you may need to reduce your principal balance by $10,000 in the year preceding.
>> More: What Is Home Equity?
Must meet your lender payment history criteria.
Before you can recast, your lender may require a history of on-time payments. For example, some mortgage lenders may require two consecutive on-time payments on your current loan before recasting. Keep in mind that this requirement varies from lender to lender.
What Types of Mortgage Loans Can Be Recast?
Recasting your mortgage can save you monthly payments while preserving your current interest rate. However, not all lenders offer the service, and not all loans qualify. Conventional and jumbo mortgages can be recast, but government-sponsored loans like FHA and VA loans cannot be recasted.
Mortgage Recasting vs. Refinancing
When deciding between recasting or refinancing your mortgage, you should consider your financial goals. Both of these mortgage strategies can effectively reduce your monthly payments, but they are entirely different. Recasting is simple, whereas refinancing gives borrowers more options.
With mortgage refinancing, you apply for a new loan with new terms and rates, either to lower your interest rate or take equity out of your house. On the other hand, a mortgage recast recalculates your monthly payment. A recast does not affect your interest rate, term, or equity.
Refinancing makes sense if:
- You can receive a better rate now.
- You need to refinance or use your home equity.
- You lack the funds to pay off your loan.
It’s wise to do a mortgage recast if:
- You have a lot of money to pay down the principal.
- You like your current rate and have extra cash to pay off your debt.
- You don’t want or can’t get a refinance.
How to Calculate Your Mortgage Recast
While it is common for your lender to provide you with the necessary information regarding the changes in your mortgage, there is no harm in calculating your mortgage recast. Do the math, and you’ll see how recasting pays off. Let’s say your original loan was as follows:
Current mortgage balance and payments
- Balance: $300,000
- Interest rate: 4%
- Monthly payment: $1,430
- Total interest over life of loan: $215,600
Imagine having an extra $40,000 saved. You recast it and pay your lender a $200 recast fee. This is how your re-amortized loan would look:
New balance and payments with mortgage recast
- Balance: $260,000
- Interest rate: 4%
- Monthly payment: $1,240
- Monthly savings: $190
- Total interest over the life of the loan: $187,050
- Interest savings: $28,550
If you noticed, your mortgage terms and interest rate remained unchanged in the above example. But your monthly mortgage payments dropped significantly. In addition, there is a significant reduction in the amount of money you spend on interest payments over the life of the loan.
What Are the Advantages of a Mortgage Recast?
Below are some of the benefits of recasting your mortgage:
- Recasting is cheaper. Instead of paying closing fees as you would with mortgage refinancing, you pay a nominal flat-rate recasting fee.
- No credit check or assessment is required. You don’t need good credit to carry out a mortgage recast. Also, unlike a refinance, there is no need to wait for an appraisal.
- Your existing interest rate remains. The main difference between a recast and a refinance is keeping your current interest rate.
- You can save on interest and pay less. A mortgage recast is ideal if you have a large amount of money towards your mortgage principal but are uncertain about future income. It saves you money on interest without increasing your monthly payment.
What Are the Disadvantages of a Mortgage Recast?
Below are some of the disadvantages of recasting your mortgage:
- If your current loan is new, you may have to wait. Before recasting your mortgage, most lenders want confirmation of six months’ worth of payments.
- You can’t adjust your loan terms. You can’t reduce the rate or shorten the repayment term even if current interest rates are lower.
- You may lose tax incentives. Less loan amount implies less interest deductible.
- No additional cash investing opportunities. The funds could be used for retirement, college, or stock funds.
- Your lender or servicer may not offer mortgage recasting. However, not all conventional or jumbo mortgage lenders and servicers provide recast mortgage services.
Does Mortgage Recast Reduce Interest?
Recasting can reduce the amount of interest paid during the loan’s term if a significant enough principal payment is made.
Bottom Line: What Is a Mortgage Recast?
Recasting a mortgage or loan occurs when a borrower makes a big payment against the principal of their debt. Recasting your mortgage lowers your monthly payments while keeping the interest and terms the same. So, if you have a large amount of money either from a windfall or inheritance, doing a recast may be an excellent option if you want to lower your monthly mortgage bill or save on interest payments.