When you purchase a home through a conventional mortgage, you make payments every month based on the principal amount of the loan and your loan terms. However, what happens if you make extra monthly payments or even a large lump sum payment during your loan period? When you make these extra payments, it drops the balance of your loan. When this occurs, it can be beneficial to request a mortgage recast to decrease your monthly payment amount. But what is a mortgage recast and how does it work? When you recast an existing mortgage, the monthly payments are redetermined based on your original loan terms and the remaining balance of the loan, giving you a reduced monthly mortgage payment.
Mortgage Recast: Overview
When, as a borrower, you make a substantial payment towards the balance of your mortgage, your lender may suggest, or you may request, to recast your loan to reduce your monthly payment obligation. To do this, the lender uses your existing loan terms and interest rate to rewrite the loan based on the reduced balance. This, in turn, reduces your monthly payment as well as the amount of interest you will pay over the life of the loan.
How does mortgage recasting work?
In order for a mortgage recast to work, a borrower must begin with either a lump-sum payment toward the principal of the loan or have made multiple additional payments over time to bring down the principal loan balance. Once this is complete, the borrower can apply to the lender for amortization or a new fixed repayment schedule. In most cases, your lender will charge a servicing fee to recast your loan.
Eligibility and requirements
Not all lenders offer mortgage recasting, so you will have to consult with your lender first. In addition, not all mortgages are eligible for recast. Some common lender requirements for a mortgage recasting can include:
- Minimal principal reduction: Lenders will require a certain minimum amount in principal reduction before recasting. In most cases, this is $5,000 or more as a reduction over time or through a lump-sum payment.
- Equity requirements: Many lenders will require a certain amount of equity in your home.
- Payment history: Before qualifying for a mortgage recast, many lenders will require a consistent on-time payment history on your current loan.
- Type of mortgage: Recasting also depends on the type of mortgage you currently hold. Government-backed mortgages, such as FHA or VA, are not eligible for recasting.
Mortgage recasting vs mortgage refinancing
What is the difference between mortgage recasting and mortgage refinancing? With a mortgage recast, you maintain your current mortgage. The only thing that changes is amortization. This means there is no need to apply for a new loan or pay the fees associated with a new loan. This is a great option when you already have a low-interest rate and simply want to reduce your monthly payment. If you want to lower your interest rate, however, refinancing may be a better option.
Refinancing involves applying for a new loan and new loan terms. In some cases, this can mean a lower interest rate which can further reduce your monthly mortgage payments. However, it can also mean a higher interest rate depending on the market.
Types of mortgages that may be recast
Not all lenders offer mortgage recasting and not all loans are eligible for recasting. If you are considering recasting your mortgage, check with your lender first to determine whether your loan is eligible and if they offer this option. Types of mortgages eligible for recast can include:
- Conventional loans
- High-balance mortgages
- Jumbo mortgages
- Option ARM
- Negative amortization loans
Should you recast your mortgage?
Determining whether to recast or refinance your current mortgage depends on your goals. If you are looking to simply reduce your monthly mortgage payment after making a lump-sum reduction to your balance, then a recast is likely your best option. However, if you are looking for lower interest rates or extending the terms of your loan, then a refinance may be what you are looking for. When it comes to mortgage recasting, there are pros and cons.
- No credit checks
- Less interest paid for the life of the loan
- Maintain your current interest rate
- No high closing costs associated with refinancing
- No lengthy application processes
- Not offered by all lenders
- Not available for all mortgage types
- Must make a minimum lump-sum payment reduction of the principal
Calculating mortgage recast
Before considering mortgage recasting, it is a good idea to calculate how recasting will change your monthly mortgage payments. Many sites offer mortgage recast calculators that allow you to punch in the numbers and see your new monthly payment. However, figuring it out manually is possible. You begin by figuring out your current principal remaining on the mortgage. Subtract the amount of your lump-sum payment to give you a new principal balance. Then, using the terms and interest rate of your current loan, determine the new monthly payment.
For example, if you have a 30-year fixed mortgage with a balance of $200,000 and an interest rate of 4.99%. Your current monthly payment is $1,072. If you make a lump sum payment of $40,000, this brings your principal down to $160,000, reducing your monthly payment to $871.
Reducing your monthly mortgage payments with recasting
Whether you come into some money or decided to dip into savings, making a large lump-sum payment and recasting your mortgage can save you money in interest payments over the long term, as well as reduce your monthly expenses. At Hero Home Programs, we understand that recasting or refinancing can seem overwhelming for borrowers. Our team is here to answer all your questions and help you find the refinancing or recasting option that best suits your needs. To learn more about how we can help, schedule a call with us today.