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For homeowners with mortgage loans, refinancing (read: swapping out your original loan for a new loan with different terms) is a well-known way to lower monthly mortgage payments.
But refinancing isn’t the only option. Have you ever thought about a mortgage recast?
Not sure what that is? We can explain what mortgage recasting is (it’s a lot different than refinancing) and when it might make dollars and
cents sense for you to consider it.
What Does It Mean To Recast Your Mortgage?
Recasting a mortgage is when you make a large lump-sum payment toward a loan’s principal balance and the lender recalculates the loan based on the new balance.
By large lump-sum payment, we mean $5,000 or more. Most lenders require a minimum of $5,000 for a mortgage recast.
The result of that large payment will be reduced monthly mortgage payments, making your monthly housing costs more affordable. A lower monthly mortgage payment is a great benefit, but it isn’t the only one – we’ll get into more recasting benefits later.
So, how does recasting work?
First, you make the extra payment. That payment shrinks the principal balance on the mortgage loan by whatever amount you paid. Next, your lender recalculates your loan using the loan’s original interest rate, the original loan term (aka loan length) and the new, smaller loan balance. Your new loan balance is divided by the number of months left until the end of the loan’s term to get your new monthly mortgage amount.
Recasting vs. Refinancing
Let’s get into the differences between a loan recast and a loan refinance.
A mortgage recast isn’t a new loan
With a mortgage recast, your existing mortgage remains your mortgage.
When you refinance, you replace your original mortgage with a new loan that comes with different loan terms. To get that new loan, there are steps you have to take, like filling out a new mortgage application, getting your credit score checked and maybe even paying for a home appraisal.
With a mortgage recast, there are a lot fewer steps involved – and you keep your existing mortgage.
With a mortgage recast, your interest rate and term remain the same
Because the mortgage loan hasn’t changed with the mortgage recast, the loan’s interest rate and the loan term stay the same. But here’s what does change: the remaining balance on your mortgage and your monthly mortgage payment.
On the other hand, a refinance is an opportunity to change the terms of your mortgage by getting a new mortgage with new terms. The length of the new loan can be shorter or longer than the original loan. You can lower the mortgage loan rate and even switch the type of mortgage you have.
Let’s say, for example, that you bought a home with a Federal Housing Administration (FHA) loan. Once you’ve built up 20% equity in your home and can eliminate mortgage insurance, you may decide you want to switch to a conventional loan.
A recast tends to cost less in fees
Recasting and refinancing both come with fees, but the fee to recast is generally lower than what it costs to refinance.
On average, the total cost to refinance is $5,000. What you pay to recast will mostly be based on the size of your loan and the home’s condition, but recasting fees are typically a few hundred dollars. Recasting fees aren’t the only payments you’ll need to take into consideration – don’t forget about that large lump-sum payment.
Because of the large payment, recasting is generally more expensive upfront – but you’ll save money in the long run.
What’s an Example of a Mortgage Recast?
Look for an online calculator to help you figure out what a mortgage recast might do for you. And bonus, we’ve got a real-life example right here:
Let’s say you got a $300,000 mortgage loan with a 30-year term at a 4.5% interest rate.
For 15 years (180 months), you’ve been making a monthly mortgage payment of $1,520.06 (principal plus interest), and your remaining mortgage balance is $198,701.92.
If you didn’t recast, you’d end up paying $74,908.14 in interest on the remaining 180 months of loan payments.
But, plot twist! You’ve come into an unexpected, large sum of money – let’s say it’s $30,000 – and you decide to put your windfall toward your mortgage. So, you ask your lender to recast your mortgage and apply the money to the mortgage principal.
You pay $250 for the recasting fee, and after the $30,000 is applied to the mortgage balance, your new monthly mortgage payment on your remaining 180 payments will be $1,290.56. That’s a monthly savings of $229.50.
And we keep the saving game going, everybody. You’d save $2,754 each year. That would add up to $41,310 over the remaining 15 years of your loan’s term. Subtract your $30,000 payment and that’s $11,310 saved.
How Do I Qualify for a Mortgage Recast?
Besides coming up with the minimum $5,000 lump sum you’ll need to recast (some lenders may require a larger payment), you’ll need to meet certain requirements:
A conventional mortgage
You can’t recast government-backed mortgages, like FHA loans, U.S. Department of Agriculture (USDA) loans or Department of Veterans Affairs (VA) loans. To lower the monthly mortgage payment on a loan that’s insured by the federal government, your best option would be to refinance the mortgage. And the same goes for jumbo loans. They’re usually not eligible for a mortgage recast.
Meet the lender’s equity standards
Your lender will require a specified amount of equity in your home. Some lenders will also require that you’ve reduced your loan principal by a certain dollar amount under a certain time frame. For example, a lender might ask that you reduce the loan’s principal by $10,000 over 12 months.
Satisfy the lender’s payment history requirements
Most lenders will require that you’ve been making on-time mortgage payments, particularly in the very recent past, like the past few months.
When Is It a Good Idea To Recast Your Mortgage?
You should talk to your lender to figure out if it’s a good idea to recast your mortgage and when would be a good time to do it. But, here are some of the most common reasons why homeowners recast their mortgages:
You want a lower payment, but interest rates have gone up
If interest rates are higher than they were when you first took out your mortgage loan, a recast could be a good alternative to refinancing. When you recast your loan, you keep your existing – and in this case, lower – interest rate.
You have extra money earning less than your mortgage interest rate
If you have extra money that you’re not investing or earning a return on, putting that money toward a recast might be a good use of that money.
You’re buying in a very competitive market
You can use recasting to indirectly give you a competitive edge when buying a home.
In a competitive housing market, a purchase offer with no home sale contingency (think: the buyer must sell their home to buy a new one) is more likely to be accepted than a purchase offer with a home sale contingency attached. If you buy the new home before you sell your current home, you can avoid adding a home sale contingency to your offer.
This is where recasting comes in. After the sale of your home, you can use the money you made on the sale to recast the mortgage loan on the new home.
What Are Some Disadvantages of Mortgage Recasting?
There are certain scenarios when recasting might not be the best choice. Here are some of the most common cons of recasting:
You can’t take advantage of lower interest rates
When you recast, your interest rate stays the same as when you originally took out the loan. If interest rates have dropped since then, you won’t be able to take advantage of a lower rate.
The length of your mortgage stays the same
Recasting your mortgage lowers your monthly loan payment, but the number of months you’ll be paying your mortgage will stay the same. If you’re looking to pay off your mortgage sooner rather than later, a recast won’t put you any closer to that goal.
Your money is tied up in your home
If you put a lot of your money into recasting, you’re reducing the cash you have on hand. That money won’t be available for future projects, investing or emergencies.
Why Not Just Make an Extra Principal Payment Without Recasting?
Okay, so what’s the point of recasting if you can make a lump-sum payment and save the fee? Making extra payments on your principal balance is a legit money move. You’d shorten the length of your loan, but you’d be making the same mortgage payment every month.
Interested in a Mortgage Recast?
Mortgage recasting isn’t an option that all lenders offer.
But, if it sounds like the right option for you, talk to your mortgage lender. Your lender can crunch the numbers and see if a recast is worth the time, effort – and money.
Freddie Mac. “Understanding the Costs of Refinancing.” Retrieved January 2022 from https://myhome.freddiemac.com/refinancing/costs-of-refinancing