Mortgage recasting is a real estate term that many homeowners don’t know about.
While mortgage refinancing is more commonly known and used among borrowers, mortgage recasting is great to reduce your monthly payments.
What should you take into consideration before recasting your mortgage? And when is recasting a mortgage a good idea?
Let’s get started!
What is a Mortgage Recast & How Does it Work?
When you first purchased your home, your lender calculated the monthly mortgage payments based on the principal balance and the loan term. And for years now, you’ve paid your monthly payment and the balance has decreased.
A mortgage recast is when your lender recalculates the monthly payments on your current loan based on factors such as the remaining term and outstanding balance. If you can make a lump sum payment, it may make sense for you to look into mortgage recasting. If you pay extra towards the loan principal, you simply just owe a lower amount with the same monthly payment, but if you recast, your monthly payment is also lowered.
Although the process is relatively straightforward, mortgage recasts aren’t offered by all lenders. They’re also not automatic.
Eligibility and Guidelines for a Mortgage Recast
Mortgage recasting is a great option for a homeowner who wants to reduce their monthly payments without going through the hassle of changing terms. However, not everyone qualifies.
Mortgage Recasting Eligibility and Guidelines:
- Your loan must be in good standing. This also ensures a lender not to require a credit check, income verification, or home appraisal.
- You must have a conventional loan, as this is the only type of loan where recasting is available.
- Depending on the lender, you’ll generally need at least $5,000.
- You will be likely required to pay a recasting fee, typically somewhere in the range of $250 to $300.
The guidelines listed above are just general eligibility requirements. Depending on your lender, they may require more. Additionally, if you meet these requirements, you can recast your loan as many times as you want!
Recast vs Refinance: What is the Difference?
Mortgage refinancing is when you replace your existing mortgage with a new one. You do this through either a rate-term refinance or cash-out refinance. Regardless of which option you choose, refinancing offers several options to homeowners.
Mortgage recasting is different in that the main objective is simply to reduce your monthly payment. Your terms, such as interest rate and loan length, do not change. Your balance and your monthly payments do – for the better!
Both refinancing and recasting come with their own benefits and drawbacks. If you have a lump sum payment and a good interest rate, here are some things you need to know about mortgage recasting.
Advantages of Mortgage Recasting
A lower monthly payment is the ultimate advantage of mortgage recasting. However, there are a few other benefits to take into consideration:
- Recasting fees are lower than closing costs. Additionally, there aren’t any closing or home appraisal costs.
- A faster process than refinancing.
- No credit check or income verification required.
- Reducing your principal balance, therefore the amount paid toward interest.
- Keeping your current interest rates regardless of the market.
- No extension to the remaining term of your loan.
Disadvantages of Recasting
While recasting does lower your monthly payment, there are some instances where it doesn’t reduce it as much as refinancing would. This depends on several factors such as your unique situation, current market, and lender. Here are a few drawbacks of mortgage recasting:
- You must meet requirements
- You can’t take equity out of your home.
- You keep the same interest rate – sometimes refinancing can make your rate much lower.
- Mortgage recasting is only offered on conventional loans.
- Not all lenders participate in mortgage recasting.
- There are often restrictions on how much you owe and your payment history.
How to Calculate Your Savings
The best way to calculate your mortgage recast is to use an amortization calculator, but you can also calculate it manually.
- Know the date in which you intend to make a lump-sum payment.
- Calculate your monthly payment in the years you have left on your loan according to your new balance. Remember the interest rate will not change.
For example, let’s say you have a 30-year fixed mortgage rate with a remaining balance of $300,000 at a 4.00% interest rate. Your monthly payment is roughly $1,000. If you pay a lump sum payment of $20,000, your balance decreases to $280,000 with a lower monthly payment.
Should You Recast Your Mortgage? Is it Right for You?
There are several options for lowering your monthly mortgage payments, and it’s often hard to figure out which one is right for you. If you already have a good interest rate and meet the requirements listed above, then you should consider mortgage recasting.
Homeowners who receive a large cash payment from life events like inheritance or a bonus, use it as a way to reduce their monthly mortgage payments. Additionally, if mortgage rates have increased, then it makes sense to pay down your balance, keep your current interest rate, get more equity in your home, and recast to adjust your monthly payment amount.
Another way to determine if recasting is right for you is to assess your living situation. Do you plan on moving soon? If so, a mortgage recast can help reduce your new mortgage payments after the sale of your old home. Once you receive funds from the sale, you can make a lump-sum payment and ask your lender to recast your loan.
To learn more about recasting and how to recast your loan, contact us today!