A recast mortgage is an often-overlooked strategy that can help homeowners lower their monthly payments without refinancing. If you’ve recently received a lump sum of money or want to make a significant payment toward your mortgage principal, recasting your mortgage might be a smart option. This article will help you understand if a mortgage recasting is the right option for you, so keep reading to learn more.
What is a Recast Mortgage?
A recast mortgage, also known as mortgage recasting, is when a homeowner makes a large payment toward the principal balance of their mortgage, and the lender re-amortizes the loan based on the new, lower balance. This process reduces the monthly mortgage payment while keeping the interest rate and remaining loan term the same.
Mortgage recasting differs from refinancing because it doesn’t involve securing a new loan or altering the interest rate. Instead, it adjusts your current loan to reflect the lower balance, providing an opportunity to lower your monthly payments without the costs and paperwork associated with refinancing.
How Does a Recast Mortgage Work?
Here’s how a recast mortgage works step by step:
Make a Lump Sum Payment
The homeowner makes a substantial payment toward the loan’s principal. The amount varies depending on the lender’s requirements, but it’s typically $5,000 or more.
Request a Recast
Once the payment is made, the homeowner requests a mortgage recast from their lender. Not all loans or lenders offer recasting, so it’s important to check with your lender if this option is available.
Re-Amortization
The lender recalculates the monthly payments based on the new, reduced principal balance keeping the existing interest rate and remaining the loan term. This adjustment results in lower monthly payments.
Example of a Mortgage Recast:
Imagine you have a $300,000 mortgage with a 4% interest rate and 25 years remaining. If you receive a $50,000 bonus and use it to pay down your principal, your lender can recast the mortgage based on the new balance of $250,000. Your interest rate remains 4%, and you still have 25 years to pay off the loan; however, your monthly payments will decrease because of the reduced principal.
How Much Does a Mortgage Recast Cost?
The cost of a mortgage recast is typically lower than that of refinancing. While refinancing often includes substantial fees, like appraisal costs and loan origination fees, recasting usually involves a one-time fee ranging from $150 to $500, depending on the lender.
This fee is minimal compared to the costs associated with refinancing, making recasting a more affordable option for homeowners looking to lower their payments without a lengthy and expensive process.
Is It a Good Idea to Recast My Mortgage?
Whether recasting your mortgage is a good idea depends on your financial situation and long-term goals. Here are some pros and cons to consider:
Benefits of Recasting a Mortgage:
Lower Monthly Payments: By reducing the principal balance and re-amortizing the loan, recasting lowers your monthly payments, making your mortgage more affordable without extending the loan term.
Minimal Costs: Recasting is typically less expensive than refinancing since it involves a small fee rather than the high closing costs associated with taking out a new loan.
Keep Your Interest Rate: Unlike refinancing, which requires securing a new loan at the current market rate, recasting allows you to keep your existing interest rate. This can be advantageous if your current rate is lower than today’s market rates.
No Impact on Credit Score: Recasting your mortgage does not involve a credit check, so it doesn’t impact your credit score. Refinancing, on the other hand, may affect your score as it involves a new loan application.
Drawbacks of Recasting a Mortgage:
Large Upfront Payment: Recasting requires a lump sum payment toward the principal, which may not be feasible for all homeowners. If you lack extra funds, this option may not be realistic.
No Interest Rate Reduction: If you’re hoping to lower your interest rate, recasting won’t achieve this. In such cases, refinancing may be a better option if interest rates are lower than when you initially took out your mortgage.
Limited Availability: Not all lenders or loan types allow recasting. If you have an FHA, VA, or USDA loan, for example, you may not be eligible for a recast.
Can I Recast My Mortgage at Any Time?
Whether you can recast your mortgage depends on your lender’s policies and the type of loan you have. Here are some key points:
Lender Policies
Many conventional loans from major banks and lenders permit recasting, but it’s important to verify with your lender to confirm their specific requirements. Some lenders may have a minimum principal reduction amount, such as $5,000 or more, to qualify for a recast.
Loan Type
Conventional loans are the most commonly recast, whereas government-backed loans like FHA, VA, or USDA generally do not offer this option. If you have one of these loans, refinancing may be the only way to adjust your mortgage terms.
Timing
Some lenders allow homeowners to recast their mortgage multiple times, while others limit the number of times you can recast during the loan’s lifetime. It’s important to clarify these details with your lender before making a lump sum payment.
What is the Difference Between Recasting a Mortgage and Refinancing?
Both recasting and refinancing adjust your mortgage, but they work in fundamentally different ways:
Recasting:
- Adjusts your existing loan by lowering the principal balance and recalculating monthly payments.
- Keeps the interest rate and loan term the same.
- Requires a lump sum payment and a small fee, typically $150-$500.
- Does not affect your credit score, as it doesn’t involve applying for a new loan.
Refinancing:
- Replaces your current loan with a new one, potentially at a lower interest rate.
- Can change the loan term, allowing you to shorten or extend the duration of the loan.
- Involves higher costs, including appraisal, origination, and closing fees.
- May affect your credit score due to the credit check and new loan application process.
How to Calculate a Recast Mortgage
To calculate how much your monthly payments will be after a mortgage recast, follow these steps:
Determine Your New Loan Balance:
Deduct the lump sum payment you intend to make from your current mortgage balance. For example, if your mortgage balance is $250,000 and you plan to pay $50,000, your new balance will be $200,000.
Use Your Current Interest Rate:
Keep the same interest rate from your original loan agreement.
Calculate the New Monthly Payment:
Re-amortize the loan using the new balance, the original interest rate, and the remaining loan term. You can use online mortgage calculators to input these values and determine your new monthly payment amount.
Example:
If you have a $250,000 mortgage at a 4% interest rate with 20 years left on the loan, your monthly payment is approximately $1,500. By paying $50,000 toward the principal, your new loan balance is $200,000. Using the same 4% rate and remaining term, your new monthly payment may drop to around $1,200.
When Should You Consider Recasting Your Mortgage?
Recasting can be a smart option under the right circumstances. Here are a few scenarios where it may be beneficial:
You Have a Lump Sum Payment
If you receive a bonus, inheritance, or other significant sum of money and wish to reduce your mortgage payments without altering your interest rate, recasting can be an effective solution.
You Plan to Stay Long-Term
If you intend to stay in your home for a long time, recasting can lower your payments without the costs and complexity of refinancing.
Your Interest Rate is Already Low
If you secured a low interest rate when you first took out your loan, recasting allows you to benefit from lower payments without losing your favorable rate.
In summary, a recast mortgage is a useful tool for homeowners seeking to reduce their monthly payments without the hassle and costs involved in refinancing. By making a lump sum payment, you can adjust your loan balance and payment schedule while keeping your existing interest rate and loan term.
However, it’s crucial to weigh the pros and cons and check with your lender to see if you’re eligible for recasting. Understanding how it works and calculating your potential savings will help you make the most of your mortgage and reach your financial goals.
