If you’re a new homeowner feeling overwhelmed with your monthly mortgage payments, renovation costs, interior design purchases, and everything else that takes a toll on your wallet after purchasing a home, you’re probably looking for an opportunity to set aside some cash.
Mortgage recasting can be a great opportunity for homeowners who aren’t necessarily wanting to change the terms of their mortgage, but want to save some money in the long run. Let’s talk about the process, the benefits, and what else to consider if you choose to recast your mortgage.
What Is Mortgage Recasting?
Mortgage recasting, also known as a loan recast, is when a borrower makes one large, lump-sum payment on their loan to the principal balance of their mortgage. After this payment, the lender will reamortize, or recalculate, the remaining balance of the loan (including both principal and interest totals) into new monthly payments due based on this new sum.
Recasting your loan will lower your total balance as well as adjust your monthly payments, making your monthly amortization less expensive than it was previously. If a lender approves a mortgage recasting, they will typically require a lump sum deposit of $5,000 or more, as well as a mortgage recasting fee (typically no more than a few hundred dollars).
The terms and regulations of mortgage recasting depend on the loan amount and the specific lender.
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Benefits of Mortgage Recasting
Homeowners who qualify for and can afford to go through with mortgage recasting can participate in order to save money for other housing expenses, or to simply help pay down the balance on their home. A recast mortgage will give homeowners lower monthly payments, which means less interest paid over the life of the loan.
Bankrate.com gives this example:
“If your 30 year mortgage carries a principal balance of $200,000 with a 5% interest rate, you might be paying $1,200 per month on your mortgage. If you put down $50,000 plus a $250 recasting fee, you’ll end up saving almost $35,000 in interest payments and about $300 per month in monthly mortgage payments.”
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Instances where mortgage recasting might be ideal:
- A homeowner has purchased a new home and signed their agreement, while still waiting for their existing home to sell. Once their initial home sells, they can put the proceeds of that sale toward their new mortgage in one large sum for a mortgage recast.
- An individual receives a large inheritance or employment bonus and wants to put it toward their principal mortgage total all at once.
If you’re financially able to recast your mortgage, you can potentially be debt-free a lot sooner than you may have anticipated.
What to Know Before You Recast Your Mortgage
Mortgage recasting sounds great, but you need to be aware of certain stipulations before you get started.
Mortgage Recasting Won’t Lower Your Interest Rate
First off, mortgage recasting will not do anything to lower a high interest rate or change the terms of your existing mortgage — it can only lower the amount of your monthly payments and how much total you need to pay off.
Some Lenders Won’t Offer Mortgage Recasting
Many lenders do not offer mortgage recasting, so hold off on getting excited about lower monthly payments until you can make sure your lender offers this service. Most large banks such as Chase and Bank of America do offer mortgage recasting, although they may not publicly advertise it.
Some Loans Won’t Qualify for Mortgage Recasting
Your option to recast your mortgage also depends on the type of mortgage loan you’ve taken out.
Some types of loans simply do not qualify for mortgage recasting, even if your bank or lender offers it. Government-backed loans such as Federal Housing Administration (FHA) and Veterans Affairs (VA) loans do not qualify, as well as most jumbo loans.
You Must Meet Certain Qualifications
Although you don’t have to meet certain credit or appraisal requirements, if you’re planning on recasting your mortgage, you need to meet the minimum principal reduction standard (the minimum lump sum payment), which is up to your lender.
You must also meet equity requirements, meaning you need to have already made a certain amount of payments to your loan before recasting.
In order to feel secure that you will make your payments on time and be responsible for the new amortization, homeowners can also be required to meet their lender’s payment history requirements and be in good, prompt standing with on-time payments to their existing mortgage.
Recasting vs. Refinancing
Recasting a mortgage and refinancing a mortgage can be easily confused, but in reality they are quite different.
Recasting means you are keeping your existing loan terms, including the length of time and interest rate, and just adjusting the new monthly payment amounts since you paid off a huge sum. If you do have low interest rates, recasting your mortgage won’t change that — but refinancing could.
Refinancing a loan means you are renegotiating all of your mortgage terms and potentially signing up for an all-new loan, with all-new closing costs, appraisal terms, etc. This new loan under the refinanced terms will pay off your initial loan with all new monthly payments and interest rates.