Mortgage recasting: What it is and how it works
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Want to shave dollars off your mortgage payments, as well as save money on interest? You might consider a mortgage recast. It’s fairly easy to do, and a relatively simple way to make your monthly payments more manageable.
Of course, as with any financial strategy, there are caveats to consider — starting with the fact that it’ll require a big cash commitment up front.
Let’s look at recasting mortgage loans, from what it is to what it can do for you.
- Mortgage recasting lets you reduce your conventional loan repayments by making a large lump-sum contribution towards your principal.
- Mortgage recasting results in smaller monthly payments on the same schedule.
- Recasting is simpler and cheaper than refinancing, but it doesn’t alter your interest rate or shorten your loan term.
What is mortgage recasting?
Recasting your home loan is one form of prepaying a mortgage.
A mortgage recasting, or loan recast, occurs when a borrower makes a large payment toward the principal balance of their mortgage. The lender, in turn, reamortizes the loan. This means that your loan is reduced to reflect the new balance.
Recasting cuts your monthly payments and the amount of interest you’ll pay over the life of the loan. A recast mortgage does not, however, affect the interest rate itself, or the terms of your loan. It does not mean you pay off your mortgage early: Your payoff schedule matches what it would have been originally, but with each monthly payment adjusted to reflect the new balance.
How mortgage recasting works
Still, that surcharge can be worth it when compared with your potential long term interest savings.
Here’s how recasting works, step-by-step:
- You pay a big sum. Lenders usually require either a certain amount (generally, $10,000) in a lump sum or in additional payments to recast your loan. Some may set a percentage of the principal as their minimum.
- Your lender reamortizes your loan. The lender looks at the number of payments remaining until the end of the mortgage’s term, then calculates your new monthly repayment based on that schedule.
- Your lender bills you a surcharge. Typically, you have to pay a fee to recast your mortgage. The fee varies by lender, $250 to $500 being the typical range.
- You get a new repayment amount. The lender will give you the adjusted amount you have to pay each month, based on your smaller principal.
Mortgage recasting example
To see how recasting can impact your loan, consider this example, using Bankrate’s loan amortization calculator.
Your 30-year mortgage carries a principal balance of $200,000 with a 5 percent interest rate. The monthly payment is $1,074 per month before taxes and escrow.
After 10 years, your outstanding mortgage balance is $162,684.13. You then decide to make a $50,000 lump sum payment to recast the loan, plus a $250 recasting fee.
That reduces the balance of your loan to $112,684.13. Your monthly payment for the next 20 years will drop to $744, $330 less than your original payment.
HOW RECASTING AFFECTS YOUR MORTGAGE
|Time elapsed||Amount spent without recasting||Balance left without recasting||Amount spent with recasting after 10 years||Balance left with recasting after 10 years|
Keep in mind, recasting doesn’t reduce the term of your mortgage — the number of payments you make or the timespan — just how much you pay each month.
Mortgage recasting qualifications and availability
Before you get excited about lower monthly payments, first make sure your lender offers recasting — many don’t. It’s also not something that’s normally advertised, but some of the big banks offer it.
You’ll likely need to meet specific equity and principal reduction standards to qualify for a recast loan. Your payment history could also affect your options.
Not all mortgages qualify for recasting. Government loans, like FHA loans and VA loans, can’t be recast.
The basic eligibility requirements are:
- Minimum principal reduction. Many lenders require that you make an upfront payment or have previously made additional payments that reduced your loan principal by at least $5,000 or $10,000 before recasting.
- Home equity requirements. You need to have sufficient equity, which can vary from lender to lender. You’ll struggle to recast if you have limited or no equity.
- Payment history. You need to have a clean, on-time record. Lenders won’t let you recast if you’ve missed payments or made insufficient payments recently.
- Must be a conventional loan. VA, FHA, and USDA loans are not eligible for recasting — only mortgages underwritten by a private lender.
Mortgage recasting vs refinancing
There’s a big difference between recasting a mortgage and refinancing one, even though both can help borrowers save money.
Refinancing requires that you apply for a brand-new mortgage and pay all the fees that go with it. The new loan would pay off your existing loan, so you end up with a new mortgage as well as a new interest rate. Borrowers typically refinance to get a lower interest rate, to go from an adjustable-rate mortgage to a fixed-rate mortgage or to cash out some of the equity in their home.
Recasting is a much simpler process. With recasting, you’re keeping your existing loan, only adjusting the amortization. You wouldn’t be able to get a lower interest rate or a shorter loan term with recasting, like you might with refinancing. On the other hand, if your interest rate is already low — or at least lower than prevailing rates — then much of the advantage of refinancing is gone. In that case, a loan recast might be preferable to a refinance because it allows you to keep your current rate.
Pros and Cons of mortgage recasting
Pros of recasting mortgage loans
Recasting is appealing because it’s fairly easy to do and it’s a relatively inexpensive way to lower monthly payments. Here are a few reasons you might want to consider recasting your existing mortgage:
- Lower your monthly payments by making one lump sum payment
- Avoid having to requalify for a new loan
- Keep your interest rate if you currently have a low one
Cons of a recast mortgage
The biggest financial drawback of recasting is that you’re putting a large sum of money into one asset: your home. These are a few reasons you might want to rethink recasting:
- It doesn’t shorten the length of your mortgage
- Your APR stays the same, a disadvantage if you have a higher interest rate
- More of your money is tied up in illiquid home equity
- The lender charges a fee, although it’s typically no more than a few hundred dollars
How to calculate your mortgage recast
If a mortgage recast is the right move for your finances, make sure the math checks out. You can estimate your new monthly payment after the recast with the help of Bankrate’s amortization schedule calculator.
If you still have questions about your potential savings, consult with your mortgage lender. A loan officer can help you run the numbers and understand what the best strategy is for your situation.
Should you recast your mortgage?
First up, you should consider a mortgage recast only if you have a solid chunk of change on hand that you wouldn’t miss. If you don’t already have an emergency fund built up, start there instead.
Also, think through your current and future financial needs. If you plan to retire in a few years, a recast loan can help you keep expenses low when you’re on a fixed income. Similarly, if you’re planning to take a pay cut to pursue a new career path, recasting can help you make your budget more manageable.
Before you commit this lump sum to your home equity, though, explore your other options. You may want to talk to a financial advisor. Investing that money might be a smarter move, especially if you have a low interest rate on your mortgage.
Frequently asked questions about recasting a mortgage
Mortgage recasting differs from simply making principal payments because it reamortizes your loan — that is, it makes a fundamental change to your fixed repayment process. By reducing the principal you owe, it adjusts your required monthly payment so that you still follow the loan’s original schedule towards retiring the debt. You’re just paying less each month now.
Simply making additional principal payments does not reamortize your loan. You’ll have the same minimum payment requirements each month. However, making extra ones will lead to you paying the loan off ahead of schedule.
This varies from lender to lender — and remember, some lenders don’t allow for a mortgage recast at all. Generally, you’ll need to have made several months of on-time payments in order to explore a recast mortgage. In some cases, this may be as short as six months.
Recasting and refinancing are two mortgage strategies, but they’re not the only ways to save. You can also explore options like getting rid of your private mortgage insurance (PMI), making additional payments or — in cases of financial hardship — requesting a home loan modification.