If you’re like most people, you like to save as much money as possible. That includes paying as little as you can in interest on your loans. Let’s say you hit a windfall in the lottery tomorrow. What might you do with your extra money?
One very good option would be to pay down your mortgage so you pay less interest. However, did you know that after you make a principal payment of at least $10,000 to Quicken Loans, you can have your payment recalculated with a new balance while keeping the same interest rate and loan term in order to permanently lower your monthly payment? You can.
In this post, we’ll go over what a mortgage recast is, why you might do one, whether it makes sense for you and what you need to know if you’re considering it.
What Is a Mortgage Recast?
A mortgage recast allows you to put a lump sum toward the principal balance on your mortgage. When you do this, you can request that your lender recast the mortgage. When this is done, your term and interest rate remain the same, but your lump sum payment is subtracted from the loan balance so you have a lower monthly payment than you had before the principal reduction.
In a recast, you achieve the benefits associated with a regular extra payment toward your principal – paying less interest on your loan – but you also achieve a permanently lower monthly payment because your term stays the same with a lower balance.
Why might one choose to recast their mortgage? There are really two benefits:
- You pay less interest due to a large principal reduction, even while keeping the same loan term and interest rate.
- You’ll be lowering your monthly payment because you’ve reduced your principal balance, but your loan is re-amortized – fancy mortgage lingo for payment recalculation – over the remainder of your term.
Does It Make Sense to Recast?
Whether it makes sense to go through a recast depends both on your goals in recasting as well as the terms of your lender. First, let’s look at this from a purely financial perspective.
Doing the Math
There are two ways to accomplish a major principal reduction: a recast where your monthly payment ends up lower over the same term and an additional principal payment where your monthly payment ends up staying the same, but with a lower overall principal balance. Let’s take a look at both of these alternatives.
For the purposes of this example, I’m going to assume a $200,000 initial loan balance on a 30-year fixed mortgage at a 4.99% (5.233% APR) interest rate. Let’s say you’ve just freed up $40,000 you want to use toward paying off your mortgage. Different states may have slightly different lending fees that apply. I’ve used Michigan. You can check your own numbers using our amortization calculator.
Let’s take a look at a recast scenario first.
Before recasting, you pay $1,072.43 monthly in principal and interest. Your total interest paid over time is $186,071.54 on a $200,000 balance. After the recast, your principal balance is $160,000. For the sake of simplicity, let’s assume you did this soon after you closed on your mortgage and had 29 years left.
Your monthly payment would be $870.81, a monthly savings of $201.62. Total interest paid would be $151,864.49, and you would be saving $45,722.17 in interest.
Without a Recast
Now, let’s say we take the same scenario but make the $40,000 payment toward principal without recasting the loan when there are 29 years left on the mortgage.
Your monthly payment remains the same, so you don’t save there. However, by doing this without recasting and otherwise keeping your monthly principal and interest payments the same, you end up saving $90,135.57 in interest over the life of the loan and finish paying off your loan 121 months early. That’s more than 10 years taken off the term of a 30-year loan.
Reasons to Recast
The math is different for everyone, but in many cases, it will make more sense from a financial perspective just to make the lump sum payment toward the principal and then keep making your monthly payment in order to pay down the loan.
Looking beyond financials, is there a reason you might recast your loan? It depends on your goals.
One reason to look at recasting is that it gives you a permanently lower payment compared to what you would have had if you hadn’t paid down the principal and re-amortized. If you have other things to spend your money on outside the monthly mortgage payment, this could be a good way to free some of that up on a monthly basis.
You can use the savings to put the money toward other bills, use it for other investments or boost a college or retirement fund.
There may also be a benefit to recasting if your lender doesn’t otherwise allow you to make extra payments that are applied directly to the principal. Some lenders will choose to apply anything extra you pay toward future payments so that they don’t lose any interest payments. Some of them will allow you to recast, but they don’t advertise it, so see what your lender allows. Quicken Loans does allow for both recasting and potentially paying off your loan early by making extra payments toward the principal without re-amortizing. We don’t have a prepayment penalty.
When Can You Recast?
If you’ve decided recasting is right for you, you should know a few things before moving forward.
First, not everyone can recast. If you have a government loan backed by Ginnie Mae – any FHA, USDA or VA loan – these can’t be recast due to government rules. Jumbo loans also typically can’t be recast.
Secondly, you need to make sure your lender allows for the mortgage recasting. Some don’t allow for it at all.
Quicken Loans offers the ability to recast our conventional loans – those invested in by either Fannie Mae or Freddie Mac.
Assuming you can recast, lenders will also have their own guidelines about when you can do it. These fall into several categories:
- There’s usually a minimum amount of principal you have to be paying off before the lender will do a recast, either expressed as a flat amount or as a percentage of the loan balance. At Quicken Loans, we require that clients make at least $10,000 in principal reduction payments in the year prior to recasting.
- You have to make at least two consecutive monthly payments at your current payment amount before a loan can be recast.
- There may be a small fee associated with the recast. We charge $100 to recast your loan.
- We don’t limit the number of times you can recast your loan.
Finally, you should be aware that it can take 45 to 60 days to complete a recast. During this time, you should keep making your regular payment. You’ll be able to make your new, lower payment as soon as you get your first billing statement reflecting the new payment amount.
Are you a Quicken Loans client looking into recasting? You can go ahead and give us a call at (800) 508-0944 in order to go over your options and get started.
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