Mortgage Recast

When a borrower makes a sizeable lump sum payment toward the principal balance of their mortgage and the lender, in turn, reamortizes the loan.

When a borrower makes a sizeable lump sum payment toward the principal balance of their mortgage and the lender, in turn, reamortizes the loan, this is known as a mortgage recasting, or loan recast. Your loan will therefore be modified to reflect the updated balance.

Your monthly payments and the total interest you'll pay over the loan's life will be reduced by recasting. However, it has no bearing on the conditions of your loan or your interest rate.

A financial windfall may make you consider all the enjoyable things you could do with the extra money. However, putting the money to good use might entail making a larger principal payment on your mortgage.

A mortgage recast is what this is known as. After you make the additional payment, your lender will reamortize (recalculate) your mortgage using the new, lower principal balance. The one-time payment won't change the length or interest rate of your current mortgage, but it might enable you to pay off the loan balance more quickly. 

You might also be able to lower your monthly loan payment if your loan servicer supports mortgage recasting. After you make a sizable payment toward the principal of your existing home loan, your loan servicer will recalculate your monthly mortgage payment. 

This is known as mortgage recasting. You must ask for and obtain permission to recast before sending in your payment. Otherwise, even though your sizable payment will still lower your principal, your monthly payments won't decrease.

Recasting should lower your monthly payment and ultimately lower the total amount of interest you pay. Your loan servicer won't have to look at your income, credit score, or debt-to-income ratio during the process, which is cheaper and easier than refinancing.

However, not all loan servicers provide mortgage recasting. If you do, after applying your sizable payment to the balance of your outstanding home loan, a new amortization schedule will be made. The lower loan balance will serve as the basis for your new monthly payment. Your payoff date and interest rate won't change.

Before refinancing your loan:

  • If your mortgage servicer offers to recast, inquire with them - Although few service providers advertise it, only some mortgage servicer offers to recast.

  • Find out if your loan type qualifies for recasting - Not all loans are eligible. Government loans, such as FHA or VA loans, cannot be recast, for instance.

  • Determine how much you will contribute to your principal - There may be requirements, which are typical $5,000 or higher.

  • Find out if your service provider levies a fee for recasting your mortgage - For a mortgage recast, some service providers don't charge a fee, while others do.

  • Continue to make your loan payments - If not, you risk being charged a late payment fee and having your credit report negatively affected. Additionally, you might lose your right to a recast.

In response, your loan servicer should take the following actions:

  • Inform you if it provides mortgage recasting.

  • Determine the eligibility of your loan type.

  • Tell you the lowest lump sum amount it will accept.

  • Inform you of any fees associated with recasting your mortgage.

  • Let you know once the recasting is finished.

How does it work?

Understanding mortgage recasting is a fairly easy concept. Here's an illustration of how it operates:

Imagine you took out a $200,000 loan 15 years ago with a 30-year mortgage and a fixed interest rate of 4 percent. You currently have a principal balance due on your loan of about $129,000 and 15 years left to pay it off. Your approximate monthly payment is $955.

Your principal is reduced to $110,000 with a lump sum payment of $10,000. Your monthly payments will be reduced to about $880 if you recast that sum over 15 years.

For a total of 15 years (180 months), the $75 monthly payment difference equals $13,500. You'll save $3,500 in interest throughout the loan by recasting and deducting the initial $10,000 lump-sum payment.

  • How long does recasting a mortgage take?

Be aware that the process could take several weeks if you're thinking about recasting your mortgage. During that time, it's crucial to continue making your regular monthly payment. You might lose your chance at the mortgage recast if your loan payments fall behind schedule.

  • How many times can a mortgage be recast?

You can recast a mortgage as often as you'd like with some loan servicers, but others have frequency restrictions. Additionally, a recast fee might be charged each time.

  • Qualifications and availability for mortgage recasting

Check to see if your lender offers recasting before getting overly excited about lower monthly payments; many don't. Additionally, it is not typically advertised, but the majority of the major banks do provide it.

You'll probably need to satisfy certain equity and principal reduction requirements to be eligible for a recast. Your payment history may also impact your options.

Not every mortgage can be recast. Recasting is not an option for government loans like FHA and VA loans.

Qualifying for a Mortgage Recast

Not all loan servicers will refinance a mortgage, but if yours does, you may need to meet these requirements:

  • A conventional loan - An FHA (Federal Housing Administration), USDA (U.S. Department of Agriculture), or VA (U.S. Department of Veterans Affairs) loan might not be recastable.

  • An acceptable lump-sum payment - To ensure that your payment satisfies their requirements, check with your loan servicer. Many demand a minimum payment for recasts.

  • A current, satisfactory mortgage loan - You might not be eligible if you recently made late payments.

  • A minimum of two timely payments in a row at your regular payment rate - Recasting a loan that you recently closed on might not be permitted by your loan servicer.

Recasting vs. Refinancing

When deciding whether refinancing or recasting may be the better option for you, take into account these differences:

Mortgage Recasting 

If you want to maintain the same interest rate and a loan term as your current mortgage and you have extra money to invest in your home in exchange for a lower monthly payment, mortgage recasting might be a better option. It also costs a lot less than refinancing a mortgage. 

Mortgage Refinancing 

When you want to replace your current loan with a new one, mortgage refinancing might be the best choice. 

You might be able to modify your loan's term and get an interest rate reduction. To lower your loan principal, you could even do a cash-in refinance. Closing costs, however, which range from 2 to 5 percent of the loan amount, must be paid.

Recasting vs. Refinancing
 FindMoney RecastingMortgage Refinancing
1Loan BalanceGoes downMay stay the same, increase or decrease
2Monthly PaymentGoes downMay stay the same, increase or decrease
3Interest RateStays the sameMay stay the same, increase or decrease
4Loan TermStays the sameMay stay the same, increase or decrease
5CostMinimalTypically 2% to 5% of the loan

Even though both options can help borrowers save money, there are significant differences between recasting and refinancing mortgages. Recasting requires only a single payment in exchange for lower monthly payments, making it simpler than refinancing.

Recasting only modifies the amortization of your existing loan, which you keep. Recasting does not allow you to obtain a lower interest rate as refinancing does. Refinancing, however, might be counterproductive if your interest rate is already low, particularly if current rates are higher.

Contrarily, refinancing necessitates that you apply for a new loan and pay all associated fees. Your current loan would be repaid by the new one, so you might get a new mortgage and an interest rate as a result.

The main reasons why borrowers do this are to lower their interest rates or switch from adjustable-rate mortgages to fixed-rate mortgages. A refinance wouldn't benefit you if you already have a fixed-rate mortgage with a low-interest rate. 

On the other hand, you might think about a recast if you have a low-interest, 30-year fixed-rate mortgage and want lower monthly payments.

Another option for recasting your mortgage is a loan, which may be advantageous in some situations:

Loan Modification 

If you're having trouble making your mortgage payments or face foreclosure, a loan modification may be able to help. 

If you've gone through a significant financial hardship and aren't qualified for a refinance, your loan servicer may help you stay in your home by extending your loan term, lowering your interest rate, or deferring principal until you sell, refinance, or reach the end of your loan term.

Mortgage Recasting 

It enables you to make a sizable payment toward the loan's principal, which lowers your monthly payments. The loan term and interest rate remain the same. You're probably in good financial shape if you're thinking about a recast.

Advantages and Disadvantages Of Mortgage Recasting

These are some of the advantages of recasting your mortgage:

  • Lower mortgage payments each month - Your mortgage should be recast to have a lower loan balance and monthly payments.

  • Savings on interest - Less interest must be paid on your loan if your loan balance is lower.

  • Same-term loan - The term of your loan is not extended by recasting a mortgage. Additionally, if you choose to, you can still pay off your mortgage early.

  • Minimum costs - The costs associated with recasting a mortgage are typically much lower than those associated with refinancing; depending on the loan servicer, they could be as little as a few hundred dollars.

  • No credit check or appraisal is required - Recasting a mortgage is frequently simpler than refinancing because neither an appraisal nor a credit check is required, especially if the value of your home has dropped or your credit score has declined.

Contrarily there are some disadvantages too:

  • Money stashed in your home - When using a windfall to reduce your mortgage principal, you lose the ability to use that money for other purposes. You'll have less money available if you need it for an emergency.

  • The interest rate remains unchanged - If you refinance your mortgage rather than recast it, you might be able to save more money.

  • Same-term loan - You might be able to pay off the loan more quickly by making a one-time lump sum payment without recasting or just a little bit more each month.

  • Small payment reduction - Your monthly payments might only be slightly reduced by a sizable lump sum.

  • Process duration - A mortgage recast might take several weeks to complete. To keep your mortgage in good standing during that time, you must continue to make your regular payments.

The right time to refinance 

While Credible is unable to assist you in refinancing your mortgage, you can compare prequalified rates from a variety of lenders. Your decision regarding whether to refinance, recast, or stick with your current mortgage may be aided by the information you receive.

It can be conclusively inferred that:

Recasting your mortgage might make sense in the right situation. It might be beneficial to recast your mortgage to get a lower monthly payment and avoid the cost of refinancing if you have extra money available and your current home mortgage's interest rate is low.

If you took out a mortgage to buy a new home before selling your old one, that is another circumstance where a recast might make sense. If your loan servicer permits it, you might want to use the proceeds from the sale of your old home to reduce the balance of your new mortgage and recalculate your monthly payments.

Nevertheless, there are circumstances in which other choices might be preferable, such as when you refinance your mortgage when interest rates decline.

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Researched and authored by Tamanna Hassan | LinkedIn

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