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What Is A Mortgage Recast, And Is It Right For You?

5-Minute Read
Published on December 17, 2019
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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 option is to pay down a lump sum of your mortgage so that you pay less interest. Once you’ve made a lump-sum payment, you can have your monthly payment recalculated with a new balance while keeping the same interest rate and loan term. This process is called recasting your mortgage.

In this post, we’ll go over what a mortgage recast is, its pros and cons, and some alternatives to consider if recasting is not right for you.

What Is A Mortgage Recast?

A mortgage recast allows you to put a lump sum toward the principal balance on your mortgage to reduce your monthly payments. If you were to do this, your term and interest rate would remain the same. A mortgage recast helps you to pay less on your monthly payments for the remainder of the loan.

Eligibility

Not everyone can recast. One group that is excluded is anyone with a government loan backed by Ginnie Mae. These include any FHA, USDA, or VA loans. The reason these are excluded is related to how they are handled by the government. Jumbo loans are also typically exempt from being able to recast.

It’s important to note that some lenders do not allow recasting, but many do.

Assuming you can recast, lenders will also have their own guidelines about when you can do it. These guidelines are typically as follows:

  • There’s usually a minimum amount of principal you must pay off before the lender will do a recast, either expressed as a flat amount or as a percentage of the loan balance. It’s common to require that clients make at least $10,000 in principal reduction payments in the year prior to recasting.
  • You must 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. This is typically around $250.
  • There is not typically a limit around how many times someone can recast their loan.

Finally, you should be aware that it can take 45 – 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.

Should You Recast Your Mortgage?

There is not a one-size-fits-all answer to this question. Like any financial situation, you should evaluate the pros and cons of recasting before making your decision and be sure to have a conversation with your lender about the consequences of either option. Here are a few points to consider.

Pros

So, why would you choose to recast your mortgage? Typically, there are two main benefits:

  • Lower Monthly Payment – Recasting helps you to lower your monthly payment for the remainder of the loan. This is because you’ve reduced your principal balance and your loan is re-amortized. This means that it has been recalculated to benefit you over the life of your term.
  • Pay Less Interest– You will pay less interest due to the smaller principal amount due. This is true even though you are keeping the same loan term and interest rate.

Cons

On the other hand, there are several other outcomes of recasting your mortgage that you should evaluate:

  • Length Of Mortgage – When you recast, the length of your mortgage stays the same. For example, if you recast 5 years into a 30-year mortgage, you will still have 25 years left on your term.
  • Interest Rate – Just as the length of your mortgage does not change, the interest rate also stays the same. This could be a con if yours is particularly high.
  • Tied-Up Equity– If you apply a lump-sum of cash to the principal on your home, you will not have access to that cash in the future. You may want to evaluate how much you need to have on hand before choosing to recast.
  • Fees – There is often a fee of about $250 to recast your mortgage. You should ensure that your money is working for you when you recast and that there are no other fees associated with this decision.

Calculate If A Recast Is Right For You

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 look at both of these alternatives.

For this example, let’s 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 as an example. You can check your own numbers using our amortization calculator.

Let’s look at a recast scenario first.

With A Recast

Before Recast

After Recast

Difference

Principal

$200,000

$160,000

$40,000

Monthly Payment

$1,072.43

$870.81

$201.62

Total Interest (Life of Mortgage)

$186,071.54

$151,864.49

$45,722.17

Years Left in Mortgage

29

29

0

 

Now, let’s say we take the same scenario but make the $40,000 payment toward the principal without recasting the loan.

Without A Recast

Before

After

Difference

Principal

$200,000

$160,000

$40,000

Monthly Payment

$1,072.43

$1,072.43

$0

Total Interest (Life of Mortgage)

$186,071.54

$95,935.97

$90,135.57

Years Left in Mortgage

29

19

10

  

Alternatives To Recasting

If you are looking to reduce your debt but are not eligible to recast your loan, you have a few options. As you read through them, keep in mind that you may want to discuss these potential solutions with a financial advisor or your mortgage lender before moving forward.

Make Additional Mortgage Payments

If you choose to make additional mortgage payments, you’ll want to be sure that they apply to the principal of the loan, thus bringing down the amount of interest you pay. This could impact the monthly payment that you make over time without recasting your loan.

Refinancing

When you refinance, your current loan gets paid off and replaced with a new one with different terms. In this situation, your relationship with your current lender ends and your new lender takes over from that point forward (unless you keep the same lender). Before you choose this option, speak with your current and potential lenders about what your payments, terms, and interest will be. Learn more about if you should refinance your mortgage.

Pay Off Other Debt

If paying off your mortgage faster without refinancing is not the best option for you, you may want to pay off other higher-interest debt. For example, you could eliminate your credit card debt as the interest rates are typically around 20%, whereas a home loan is typically much smaller. You could also pay down your private student loans, auto loans, and other high-interest loans. Oftentimes, people choose to use the money that they were spending on other debt to then increase their mortgage payments later on or use the money to invest.

Invest

There are several options available for investing. These are typically contingent on your income, disposable cash, and long-term goals. While saving for retirement, a second property investment, or otherwise can be a great goal, you may want to speak with a financial advisor about how to use your money most advantageously.

The Bottom Line

Deciding whether to recast your mortgage can be confusing. Luckily, you have several options if you learn that recasting is not for you. If you can recast, you have already read what the process has in store for you.

If you have further questions or are exploring recasting your home, Quicken Loans®is here to help. We offer the ability to recast our conventional loans. Additionally, you can get expert advice from our team 7 days a week and use our calculators to help you decide what the best option is for you.

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