What is a Mortgage Recast?
Mortgage recasting is when a borrower pays a lump sum of money toward their existing mortgage balance. This results in lower monthly mortgage payments.
Recasting a home loan ultimately allows borrowers to lower monthly payments and save money over the long term on interest payments over the life of their loan.
This creates the same result you would get from refinancing the loan into a lower interest rate without the hassle of a refinance.
This is a great way to manage your monthly payments in an environment where mortgage rates rise because the recast mortgage allows you to keep your current interest rate.
The Difference Between a Mortgage Recast and a Refinance?
A mortgage recast and a mortgage refinance are very different tools to lower your monthly mortgage payments.
A refinance replaces your existing mortgage with a new loan at current rates.
A recast reduces the monthly payment by reducing the principal on your current mortgage while keeping your current mortgage rate and term in place.
Refinancing a mortgage is much more complicated than a mortgage recast. To refinance a mortgage, borrowers must first qualify for a new mortgage.
This involves submitting financial documents such as income, employment, and pulling a credit report to do a credit check.
The lender will also typically require an appraisal of the property to determine its value. Once approved, the borrower will be required to pay any closing costs associated with the refinancing in addition to the existing loan balance.
After the loan is approved, the borrower’s new monthly payments will reflect the new loan terms.
A mortgage recast is a much simpler process, requiring minimal paperwork and a small fee to create a new monthly payment.
What is the benefit of a Mortgage Recast?
If you bought your home during the days of low interest rates, you probably don’t want to refinance into a higher-interest-rate loan. This is where the mortgage recast comes in.
The benefit of a mortgage recast is that it creates a lower balance on the principle of your loan, which in turn readjusts or reduces the payment amount. This doesn’t change the interest rate or the length of the loan.
Recasting your loan can save you thousands of dollars over the life of the loan. For example:
Let’s say you purchase a $460,000 house using a 30-year mortgage with a 5.5% interest rate and make a 20% downpayment ($92,000).
This means that after subtracting your down payment, the loan amount would be $368,000, and your principal and Interest payment would be $2,089. If you made all 360 payments (30 years), you would pay $752,207: $384,207 of which would be interest.
In year 5 of the loan, if you make a $50,000 payment and recast the loan, your principal and interest payment would drop to $1,779, saving you $42,113 in interest over the remaining life of the loan.
If you are interested in paying less interest instead of just having a lower payment, you might consider making a principal reduction payment instead of a recast.
Principle Reduction vs. Recasting
If you have a large sum of money and aren’t worried about reducing your payment, a better choice might be to make a large lump-sum payment that goes only toward the loan’s principal. This is called a principal reduction payment. In the example above, a straightforward “principle reduction” payment of $50,000 would save you $114,203 over the life of the same loan.
The principal reduction payment is like making extra payments; it does not reduce the payment amount but reduces the mortgage term, reducing the interest you’ll pay. Depending on your goals, this might be a better option than a recast.
Recast Mortgage Process
There is a specific process involved with recasting a mortgage. Please don’t just send your mortgage lenders extra money. It probably won’t go toward the principal of your mortgage or reduce your payment.
Begin by reaching out to your mortgage lender or whoever is servicing your loan. You can check your statement for this information. Some lenders and loan types will not allow a mortgage recast; for example, most government loans like VA loans, FHA loans, or USDA loans don’t have a recast option.
We mostly see recasting on conventional loans, and lenders that do allow a mortgage to be recast will most likely have different requirements. For example, the amount of cash required differs from lender to lender. To start the recasting process, you should plan on a minimum payment of $5,000 to $10,000.
When Can you Recast Your Mortgage?
Most lenders will require you to make several months of on-time payments before allowing you to recast the loan. This is important because many borrowers will often buy a new house before they sell their old house.
The homeowner could do this for several reasons: They don’t want to move twice, they are afraid they won’t be able to find something they like, or they have to move fast. Either way, if they can buy their new home without selling their existing one first, the recast can come in handy.
These buyers put the minimum down to get into the new house, and after selling their old home, they recast the loan. This helps eliminate mortgage insurance and high payments resulting from little money down. Before using this technique, it’s important to ensure your current lender will allow you to recast the loan and after how many payments.
You don’t want to find out after you get into your new home that you’ll be saddled with a high-interest rate and mortgage insurance.
Climbing Mortgage Rates? Consider a Mortgage Recast
The purpose of this article is to explain what recasting a mortgage is and how it works. Any opinions or advice about what to do with a large amount of cash are best answered by a financial advisor or a CPA.
These certified professionals can help you explore your smartest option before investing a lump sum into home equity. A financial advisor may suggest investing the money another way if your existing mortgage interest rate is low.
Financial experts often advise against putting all your money into just one type of investment, as diversification helps to protect your wealth and offset risk.
Most mortgage recasts are done to avoid selling a house before buying a new one, like the scenario we mentioned above.
There are other times when a recast might be a good idea, like nearing retirement. As you approach retirement, you may want to reduce your mortgage payment to fit within your fixed-income budget for retirement. The mortgage recast is a great way to accomplish this while you still have the ability to earn.
If you plan on making a major life change or accepting an opportunity that will entail a pay cut to pursue your dream career path – recasting can be an effective way to manage your budget.
Mortgage Recasting Wrap-up
In an environment where interest rates are on the rise, borrowers have several tools at their disposal to manage their mortgage’s impact on their day-to-day finances.
Tools like principal reduction payments or an adjustable-rate mortgage help manage the impact of high-interest rates. But a loan recast is a smart option for those who just want to lower their house payment. It can help you achieve your financial goals without taking on additional debt or risk.
The only potential drawback might be the processing fee, but this recasting fee shouldn’t be more than a couple of hundred dollars.
Speaking with a financial advisor or CPA is important to ensure that recasting is the best option for your financial situation. The key benefits of a mortgage recast are that it’s fast and easy, and it can help you lower your monthly house payment without having to refinance.