Mortgage Recasting: What Is It And Should You Do It?
If you have a home mortgage, you likely want to pay as little as possible in interest and monthly payments. One way to do this is to put down a lump sum toward reducing your loan principal, then having your monthly payment recalculated with a new mortgage balance. This is known as a mortgage recast, and it can be beneficial if you wish to keep the same interest rate and loan term.
What Is A Mortgage Recast?
A mortgage recast, or mortgage reamortization, allows a borrower to make a lump-sum payment toward the principal balance on their mortgage to lower their monthly payment, while keeping the same loan term and interest rate. This alters your loan’s schedule of repayment, or mortgage amortization.
Mortgage refinancing is another way you can lower your monthly payment, but it’s not quite the same as recasting. Refinancing involves taking on a new loan and using it to pay off your existing mortgage. However, this can initially be the more expensive option since it comes with more fees and potentially higher rates, depending on when you refinance.
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Understanding The Recasting Mortgage Process
The mortgage recasting process usually takes 45 to 60 days to complete. While you’re waiting, be sure to keep making your regular payment. Then, once you receive your first billing statement reflecting the new amount, you can start making lower payments.
Here’s a step-by-step overview of how the process works:
- Contact your lender. First, contact your lender and get all the details about its specific mortgage recast requirements.
- Review eligibility guidelines. Check your lender’s eligibility guidelines to make sure you qualify. Your lender can help with that.
- Determine a lump-sum payment. Calculate the lump-sum payment amount you want to make, so long as it meets the minimum requirement.
- Pay the recast fee. Though the recast fee varies by lender, you can expect to pay anywhere from $250 to $500.
- View your new, lender-calculated loan amount. After making your payments and filling out the necessary paperwork, you’ll eventually receive notification of your new monthly payment amount. It may take a few months. During this time, continue making your regular payments.
Qualifying For A Mortgage Recast
Not every borrower will qualify for a recast. For example, government loans backed by Ginnie Mae cannot be recast. Such loans include FHA, USDA and VA loans. Many lenders also won’t recast jumbo loans. Furthermore, some lenders may not allow recasting at all – but many do.
If your lender does allow recasting, they will have their own guidelines about when you can do it:
- Lenders will typically require you to pay off a minimum principal, either as a flat amount or as a percentage of the loan balance. It’s common for borrowers to make at least $10,000 in principal reduction payments in the year before recasting.
- You must make at least two consecutive monthly payments at your current amount before a lender recasts your loan.
- There’s usually a small fee of $250 to $500 that comes with the recast.
- There’s typically no limit on how many times you can recast your loan.
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How To Calculate Loan Amortization
You can achieve a major principal reduction in two ways: a recast, which lowers your monthly payment over the same term, or an additional principal payment, which keeps your monthly payment the same but lowers your overall principal balance.
For example, let’s say you have a $200,000 initial loan balance on a 30-year fixed-rate mortgage at a 4.99% interest rate. You have $40,000 you’d like to use toward paying off your mortgage. Since different states may have slightly different lending fees, you can check your own numbers using our mortgage amortization calculator. We’ve used Michigan as an example.
Let’s first see how this scenario plays out with a recast:
Example: Reducing Principal Through A Mortgage Recast
| Before Recast | After Recast | Difference | |
|---|---|---|---|
| Principal Balance | $200,000 | $160,000 | $40,000 |
| Monthly Payment | $1,072.43 | $870.81 | $201.62 |
| Total Interest Paid (Life Of Mortgage) | $186,071.54 | $151,864.49 | $45,722.17 |
| Years Left In Mortgage | 29 | 29 | 0 |
Now, let’s see how the same scenario plays out without recasting the loan:
Example: Reducing Principal Through An Additional Payment
| Before Additional Payment | After Additional Payment | Difference | |
|---|---|---|---|
| Principal Balance | $200,000 | $160,000 | $40,000 |
| Monthly Payment | $1,072.43 | $1,072.43 | $0 |
| Total Interest Paid (Life Of Mortgage) | $186,071.54 | $95,935.97 | $90,135.57 |
| Years Left In Mortgage | 29 | 19 | 10 |
When To Consider A Mortgage Recast
Of course, a mortgage recast may not be the right choice for every borrower. However, depending on your unique financial situation, a recast could make sense.
You might consider recasting your mortgage if:
- You have the extra cash and can afford a lump-sum payment.
- You’re ahead on your mortgage payment.
- You want to avoid a home appraisal or closing costs that come with a refinance.
- You don’t want a credit check.
- You don’t mind keeping your current interest rate and loan term.
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Pros And Cons Of Recasting A Mortgage
Recasting a mortgage has its benefits and drawbacks. Before making the decision to recast, it’s important to carefully weigh the pros and cons. You’ll also want to have a discussion with your lender about the repercussions associated with each option.
Advantages
Here are a few potential advantages to recasting a mortgage:
- More cost-effective than refinancing. While refinancing doesn’t require a lump-sum payment, it can be expensive once you factor in the cost of a home appraisal and closing costs. Recasting may prove to be the more cost-effective option if you’re looking to save money upfront.
- Maintain current interest rates and loan terms. With a recast, you’ll keep the same interest rates and loan terms. Then, as you lower your principal amount due, you’ll also pay less in interest.
- No impact on credit score. Unlike refinancing, recasting doesn’t require a credit check and won’t impact your credit score. This also means you won’t have to worry about meeting a credit score requirement.
Disadvantages
While the advantages can be appealing, make sure to examine the potential drawbacks:
- Loan type may not qualify. Government-backed loans like FHA, VA and USDA loans usually don’t qualify for a recast. Some lenders may not recast jumbo loans either.
- No access to home equity. A recast ties up the money you put toward paying off your home, meaning you won’t be able to access it unless you refinance or get a home equity loan.
- Loan term doesn’t shorten. While recasting your mortgage can be a great way to lower your monthly principal payment, it doesn’t shorten the term of your loan.
- Recasting fees. Each time you recast, you’ll be required to pay recasting fees. The exact amount varies by lender but is usually several hundred dollars.
Recast Mortgage FAQ
Interested in mortgage recasting but still have questions? Here are answers to some frequently asked questions.
With mortgage refinancing, you take out a new mortgage and use it to pay off your existing mortgage. It doesn’t require a lump-sum payment, but you’ll likely need a home appraisal and have to pay closing costs.
The Bottom Line
A mortgage recast allows you to take a lump sum of money and put it toward your principal balance, which lowers your monthly mortgage payment – making it more manageable over the life of the loan. If a recast isn’t right for your financial situation but you’d still like to reduce your monthly payment, you have options. That may include mortgage refinancing.
