Mortgage Recasting and What You Should Know
Recasting & What You Should Know.
Homeowners who want to save money on their home loan might want to consider options such as a mortgage recast. You will be able to pay less overall in interest costs. However, is recasting your mortgage the best choice?
Here is what you need to know before you re-amortize.
What Is a Mortgage Recast?
A mortgage recast is when you make a lump-sum payment toward the principal balance of your loan. Your lender will then re-amortize your mortgage and your loan will now have a new (lower) balance. The idea is that you can lower your monthly payments since your principal went down, but your rate and term remain the same.
For homeowners who may have received a large amount of money from an inheritance or a large bonus from work and desire to lower their mortgage expenses a loan recast is many times an excellent option.
How Does Mortgage Recasting Work?
The specifics can vary from lender-to-lender, but here is a typical scenario.
Make a payment. You will need to make a large lump-sum payment, typically a minimum of $5,000, though check the fine print to make sure. This money goes toward your loan’s principal balance and thereby reduces the overall amount you owe.
Once you make a lump-sum payment, the lender will then adjust or recast the repayment schedule to reflect the new dollar amount of your new monthly payments.
Many lenders charge a servicing fee for loan recasting. They typically are not more than a few hundred dollars, but for specifics you will want to contact your lender.
Again, recasting only lowers the amount you pay each month, it does not reduce your mortgage term.
How Do I Qualify for Mortgage Recasting?
You must not have a government-backed loan. FHA, USDA, or VA loans is not eligible under the current government rules.
Most jumbo loans are also excluded from recasting. You will need to refinance your loan if you are looking to change the terms of these types of mortgages.
You must meet minimum principal reduction standards. Most lenders require a minimum amount of money before qualifying for a recast (usually $5,000), though it can also be a percentage of your principal.
You must meet equity requirements. This means you need to already have a certain amount of equity in that has paid down on your loan before you qualify for a recast. Again, it can either be a fixed dollar amount or a percentage of your principal balance.
You must meet your lender’s payment history requirements. Your lender might require that you have a specific history of on-time payments before you can recast. Keep in mind that individual standards can vary by lender, so it is best to check to see what you can qualify for.
Should I Recast or Refinance
Both methods will save you money, but their mechanics are different. There are advantages and disadvantages with either choice, so it is crucial you understand the differences to decide what is best for you.
Recasting Your Mortgage …
Here are a few pros and cons to consider.
Recasting is less expensive. Instead of paying closing costs like you would with a refinance, you typically just pay a small flat rate recasting fee.
There are no credit or appraisal requirements. You do not need to meet credit score requirements to recast your loan. Plus, there is no need to worry about an appraisal like you would for a refinance.
You can keep your current interest rate. Recasting can allow you to keep your current interest rate, whereas with a refinance, you usually must accept the current market rate.
You can save on interest and lower your payment. Recasting can be the perfect solution if you have a large amount of money to put toward your loan, but you are not sure how your income will change in the future. Recasting allows you to save on interest without taking on a higher monthly payment.
You apply your lump sum directly to the principal. Ask your lender if they offer recasting if they don’t allow you to apply the money directly to the principal.
Your lender may not allow it. Some lenders do not allow you to apply extra payments to your loan principal, it will just go toward next month’s payment instead. Though this will get you ahead on your payment, it will not save you any money on interest.
You may not qualify for a recast. As stated, government programs like do not qualify for recasting.
You need to make a minimum payment amount. You should only consider a recast if you are able to make a minimum lump-sum payment that is either a specific fixed amount or a percentage of your principal. Plus, you will need to pay a fee.
You do not shorten the term of your loan. Your monthly payment will go down, but your term remains the same.
Reduces liquidity. The funds used for the minimum payment amount will be tied up in your home’s equity, which means you will need a home equity loan if you need to regain access to those contributed funds.
Refinancing Your Mortgage …There are benefits and downsides to refinancing.
Here are a few to consider.
You can change your loan. You will have the option to change the terms of your loan when you refinance. You can shorten your term, lengthen it, take a lower interest rate and even refinance to a new loan type. For example, to remove insurance, many homeowners refinance their FHA loans to conventional loans as soon as they reach 20% equity. You cannot change anything but your principal when you recast your loan.
Most mortgages qualify. You can refinance any type of mortgage loan. Refinancing may be your only option to change your monthly payment if you have a government-backed loan or a jumbo loan.
You can choose a new lender. If for some reason you are dissatisfied with your current lender or loan servicer, you can refinance your mortgage loan with a new one. Keep in mind however, many lenders sell their loans, and you have no control over who the new servicer may be.
Higher costs. A new loan usually costs more than a mortgage recast. You will pay more interest as you are technically are starting from scratch when you are getting a new loan. Usually, you will pay more in interest in the beginning of your loan, and later more of your payment will go toward the principal. Plus, if you refinance to a longer term, you could end up paying more in interest throughout the lifetime of your loan.
Mortgage Recast Vs Principal Payment:
What’s The Difference?
Recasting a mortgage does require making a large payment toward your principal. However, you can make extra payments on your loan without recasting it. If you do this, you will have put yourself ahead of schedule, but you will not have changed the schedule. Your monthly payment requirements will remain the same. But again, many lenders will not allow you to reduce your principal balance with a large payment.
If you have questions or need more information, please contact us for a recommendation to a financial planner or trusted lending partner. Allison's direct phone is 562-882-1581
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