What mortgage recasting is and when it makes sense
If you’ve been saving up funds for a while, or recently came into a bundle of cash, you’re probably looking for a smart way to invest that money. If you’re a homeowner, you’ll have the option to put that liquidity toward lowering your monthly mortgage payment.
Mortgage recasting involves the borrower making a single lump-sum payment to their lender, lowering the overall principal on a loan. This won’t lower your interest rate or alter the mortgage’s term, but it does reduce the amount you’ll need to pay back within that frame of time.
Unlike mortgage refinancing, which sets you up with a completely new loan, mortgage recasting only restructures your existing debt, enabling you to reduce monthly payments going forward.
How much does it cost to recast a mortgage?
The minimum amount needed for a mortgage recast varies from lender to lender. Generally speaking, you’ll have to commit $5,000-$10,000 to your mortgage principal for your lender to start the process.
Creditors will also stipulate a minimum amount of principal that must be paid off before a recast can begin. For example, your lender might require you to have paid off at least $10,000 in principal in the year leading up to your recast proposal in order to qualify.
In addition to these qualification minimums, you also have to pay a relatively small processing fee. Again, this cost will depend on your lender, but usually amounts to a few hundred dollars.
Part of the processing fee will go toward underwriting and rearranging your repayment schedule. Once the lump-sum payment is made, your lender will need to reamortize your mortgage.
What is reamortization?
The term “amortization” refers to the gradual reduction of your loan’s balance through regularly made payments. On a mortgage, these documents help borrowers and lenders maintain a clear understanding of the required monthly mortgage payment and how each scheduled installment should be doled out.
Most borrowers take out a loan with the goal of full amortization in mind. A fully amortized loan would result in the principal balance dwindling to zero right when the loan’s term concludes. When that principal balance changes unexpectedly, possibly from the result of a recast, the rest of the amortization schedule is thrown out of sync.
With a mortgage recast, a loan might need to be reamortized. Following the lump-sum payment, your lender would calculate an appropriate repayment schedule that reflects your adjusted monthly payments, or a new amortization schedule.
What are the steps for mortgage recasting?
Once you have the funds to make a large, lump-sum contribution toward your mortgage’s principal, it’s time to get the recasting process started.
The specific steps taken might vary from lender to lender, but in general, recasting your mortgage will follow these steps:
- Verify you can recast
- Lump-sum payment
- Lender reamortization
- Servicing fees
Verify you can recast
Not all mortgages are created equal and certain types of home loans might restrict you from being able to recast. Government sponsored mortgage programs, such as FHA or VA loans, are restricted from going through the recast process.
In addition, not every lender offers the same services, including mortgage recasting. You’ll need to contact your loan servicer for further information on whether your mortgage allows you to use this option. This information can also be found in your original mortgage agreement.
Once you’ve confirmed your ability to recast your home loan, you’ll need to formally notify your lender about your intent to pay off a portion of your balance. Minimums can vary between lenders, but most require at least $5,000-$10,000 from this payment in order to qualify for recasting.
This amount could also be calculated as a percentage. Be sure to ask your lender for a clear understanding of their mortgage recast minimums.
When you initially begin the mortgage process, your lender hands over an amortization schedule, outlining the required payments and associated dates throughout the life of your loan. Since recasting your mortgage changed the remaining balance of your loan, an updated amortization schedule is needed.
Once the reamortization is complete, you’ll need to pay the lender for their services when rendering your new minimum monthly payment. These service fees usually amount to a few hundred dollars and act as the administrative fees for a mortgage recast.
What is the difference between recasting and refinancing a loan?
So far, mortgage recasting might sound similar to a refinance plan. The two options both help homeowners save on their mortgage payments, but recasting tends to involve fewer steps.
When market average interest rates drop and home values rise, many buyers turn to mortgage refinance as a means of acquiring a loan with a better interest rate. Mortgage refinancing replaces your original loan with a new one, complete with generally more favorable terms and a new amortization schedule.
Buyers typically opt for a refinance as a result of changing market forces. Set up with a new loan, these homeowners are able to repay their debts with a much more manageable plan.
Refinancing is commonly used as a result of exterior market forces, while recasting comes from the homeowner’s personal financial liquidity.
When you recast a mortgage, you keep your original loan. Rather than restructuring your entire mortgage under a new terms, a recast simply adjusts the amount of principal you have left to pay, shrinking your minimum monthly payment as a result.
What are the advantages of recasting a mortgage?
If you have the cash on hand to recast your home loan, there are plenty of good reasons to consider the option:
- Pay less each month
- Does not require a credit check
- Won’t change your interest rate
Pay less each month
Recasting mortgage provides you with a lower minimum payment for the duration of your loan. Since you have less to pay over the same amount of time, recasting is a great way to pay off your mortgage while saving money in the long run.
Does not require a credit check
If you’ve run into recent credit trouble, you won't be held back from recasting your mortgage. This process does not include a credit check, since you’re working with your current lender to reamortize an existing loan.
Won’t change your interest rate
Unlike a mortgage refinance, recasting won’t alter the interest rate on your loan. So why is this an advantage? Mortgage interest payments are calculated as a percentage of your loan’s existing balance. With a lower principal left to pay off, the amount you pay in interest also decreases.
What are the disadvantages of recasting your mortgage?
Just like any major financial decision, recasting your mortgage comes with a few downsides:
- Duration of your loan
- Not everyone can qualify
Duration of your loan
Even though you’ll be making a substantial payment toward your home loan, it won’t change the amount of time you have to pay it off. If you make any additional principal curtailments and you don't recast, you will pay off your loan much faster than the original term because interest is paid in arrears. If you’re looking to fully amortize your mortgage in a shorter duration of time, it might be better to consider refinancing into a 15-year fixed rate mortgage option, for example.
Not everyone can qualify
Depending on what type of mortgage you have, you might not be able to qualify for recasting your mortgage. Conventional mortgages might allow you to recast, but government-backed programs, such as FHA loans, are restricted from this option.
Even if you have a conventional loan, your lender might not allow recasting. Be sure to meet with your loan officer in order to verify your mortgage can be recast or whether the process is worth it for you in the long run.
If you have enough money for a lump-sum payment, mortgage recasting could provide some serious benefits in the long run. It might not diversify your investment portfolio, but reducing your monthly mortgage payment frees up your finances to save at a faster rate.
Still unsure whether refinancing is a better option? A refinance calculator can put those costs into perspective. Speaking with a loan officer will also answer your recasting questions and help determine the best option for you.
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