What is Mortgage Recasting?
When homeowners looking to reduce their monthly mortgage payments, they often consider refinancing their homes. The issue with refinancing is that it resets the clock on your mortgage and may extend your payments over a longer period of time. While you save monthly, it may cost you more in the long run. There is a little known but useful trick that allows you to pay down your mortgage balance and secure a lower monthly payment while keeping your original loan and rate, it’s called mortgage recast. Understanding the advantages and possible disadvantages of a mortgage recast can equip you to decide if this is a good move for you.
What is a mortgage recast?
Mortgage recast also called a re-amortization of your loan. Mortgage recasting is when you make a large one-time payment toward the principal of your existing home loan to reduce your mortgage balance. Once you make the lump-sum payment toward principle, your lender will re-amortize (recalculate) your mortgage based on the new, lower principal balance. You keep your original loan, your original term, and your original interest rate.
Unlike mortgage refinancing, which sets you up with a completely new loan, mortgage recasting only restructures your existing debt, enabling you to reduce monthly payments going forward. Mortgage recast is simpler and less expensive than refinancing, and your loan servicer won’t need to look at your income, credit score, or debt-to-income ratio.
The advantages of a mortgage recast
Besides lower monthly payments, a mortgage recast has a few key advantages over other lending options. This includes:
- No credit check is required: With a refinance, the bank checks your credit and underwrites a new mortgage based on your current income and financial obligations
- Keeps your current interest rate: For borrowers who locked in a low interest rate before rates increased, recasting ensures that they won’t lose that attractive rate
- Less money paid towards interest. When you reduce your principal, your overall interest decreases over the life of your loan. This, in turn, reduces how much you pay for your loan overall
- No closing costs. When you refinance your loan, you’ll have to pay closing costs. Your lender may charge a fee to recast your loan, but it’s usually less than traditional closing costs
- You don’t extend the remaining term of your loan. When you refinance a loan, you may have to increase your loan term. With a recast, the length of your loan doesn’t change
- No lengthy application process. Refinancing a home involves a lot of the same processes as your original mortgage application. With a mortgage recast, there’s very little required so the process is much faster
The disadvantages of a mortgage recast
For many people, a mortgage recast is a great way to reduce monthly payments. However, your payment may not be reduced as much as it would with a refinance. A recast isn’t for everyone. Here are some potential disadvantages of a mortgage recast:
- You cannot lower your interest rate: If current rates are lower than your existing mortgage rate, you cannot lower the rate through a mortgage recast
- Cannot withdraw equity from your home: A mortgage recast uses your existing balance and doesn’t allow you to pull any equity from your home like a cash-out refinance does. If you want to take equity out of your home, you have to refinance
- Not all loans are eligible for a mortgage recast: Many lenders do not offer recast at all. For those who do, some loans are not eligible, for example, FHA, VA and USDA loans may not be recast
- Restrictions on eligibility: Some lenders place restrictions on mortgage recasts based on how much you owe, how much you’ve reduced your balance and if you’ve made your payments on time. You must initiate mortgage recast with your current lender. You can make a lump-sum payment to decrease your principal balance but without a recast your monthly mortgage payment would stay the same
Requirements for a recast mortgage
Mortgage recasting is not available to all. Here are a few requirements for a recast:
- You must have a conventional loan. Government-backed loans such as FHA or VA loans are not eligible for recasting
- Your lender must offer recasting
- You must have enough money. Most lenders require a minimum $5,000 payment to recast a loan. As such, recasting can be a good option only with large lump sums
Is there a fee for recasting?
You may need to pay your loan servicer a fee for mortgage recasting. The fee usually ranges from $250 to $500, though some lenders waive it.
Is a Mortgage Recast Right for You?
Under the right circumstances, recasting your mortgage might make sense. If you have extra funds available and the interest rate on your existing home mortgage is low, it could be helpful to recast your mortgage to get a lower monthly payment and avoid the expense of refinancing. Lower payments reduce your debt-to-income ratio, which can make it easier to qualify for other loans and frees up cash on a monthly basis.
Another situation where a recast might make sense is if you’ve purchased a new home with a mortgage before selling your old home. Once your old home sells, you might want to use the funds to pay down your new mortgage and recalculate your monthly payments, if your loan servicer allows it.
Swee Ng, Realtor and Phoenix East Valley resident specializing in win-win real estate transaction through great communication and fighting for his clients’ best interest. After all, this is more than real estates, this is about your life and your dreams.
If you are looking to buy or sell your home in Phoenix AZ and surrounding area, we hope you will consider us. Contact us today for complimentary consultation.
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