Strategies For Recasting Your Mortgage: A Guide

Recasting a mortgage is a way to lower your monthly payments without refinancing. It involves making a large lump-sum payment towards the principal balance of your loan, after which your lender will reamortize the loan to reflect the new, lower balance. This means that your monthly payments will decrease, as will the total amount of interest paid over the life of the loan. Recasting a mortgage can be a good option if you have a large amount of money to put towards your loan but are unsure how your income might change in the future, as it allows you to keep your current interest rate and loan term.

Characteristics and Values of Recasting a Mortgage

When to recast a mortgage

When You Have a Large Sum of Money

If you come into a large sum of money, such as through an inheritance, a large bonus, or the sale of a previous property, you may consider using it to recast your mortgage. This can help lower your monthly mortgage payments and overall interest paid without changing your interest rate or loan term.

When You Want to Keep Your Current Interest Rate

Recasting allows you to keep your current interest rate, which can be advantageous if you have a low rate or if the prevailing market rates are higher. If your goal is to maintain your current rate while reducing your monthly payments, recasting could be a good option.

When You Want to Avoid the Hassle of Refinancing

Unlike refinancing, recasting does not require applying for a new loan or going through a closing process. It can be a simpler and less expensive option, as you typically just pay a small flat-rate recasting fee. There are no credit score or appraisal requirements, and you can avoid the hassle of applying for a new mortgage.

When You Want to Lower Your Monthly Payments

If your goal is to make your monthly payments more affordable without refinancing, recasting can be a good strategy. By making a large lump-sum payment toward your principal balance, you can reduce the amount you owe, and your lender will adjust your repayment schedule to lower your monthly dues.

When You're Planning for Retirement or a Career Change

If you're approaching retirement or planning to take a pay cut for a career change, recasting can help keep your expenses low during those transitions. It can be a way to manage your budget and ensure that your mortgage payments remain manageable on a fixed income or reduced salary.

It's important to note that not all lenders offer mortgage recasting, and some loan types may not be eligible for recasting. Be sure to check with your lender about their specific requirements and eligibility criteria for recasting.

How to recast a mortgage

Recasting a mortgage is a way to lower your monthly mortgage payments without going through the process of refinancing. Unlike refinancing, recasting a mortgage does not require a credit check, income verification, or home appraisal. It also does not change the interest rate or the term length of the loan.

To recast a mortgage, a homeowner must make a large lump-sum payment toward the principal balance of their loan, typically a minimum of $10,000. The lender will then reamortize the loan, creating a new repayment schedule that reflects the lower balance and results in lower monthly payments. The lender may charge a servicing or processing fee for the recasting, which is usually a few hundred dollars.

Before deciding to recast a mortgage, it is important to consider the financial implications. While recasting can lower monthly payments and reduce the total interest paid over the life of the loan, it may not be the best use of a large sum of money. It is recommended to consult a financial advisor to explore all options, as investing the money or paying off the mortgage early may result in a better return on investment. Additionally, not all types of mortgages qualify for recasting, and eligibility requirements can vary by lender.

The process of recasting a mortgage typically involves the following steps:

• Contact your mortgage lender to confirm if they offer mortgage recasting and understand their specific requirements and fees.
• Ensure you meet the eligibility requirements, such as having a history of on-time payments and meeting the minimum principal balance payment.
• Provide the necessary information and documentation to initiate the recasting process.
• Make the lump-sum payment toward the principal balance of your loan.
• Pay the processing or servicing fee associated with the recasting.
• Receive confirmation of the recasting and your new monthly payment amount from the lender.

The difference between recasting and refinancing a mortgage

Recasting and refinancing are two methods that borrowers can use to save on mortgage costs. However, they work in different ways and are applicable in different situations.

Recasting

Mortgage recasting, also known as loan recasting, is a feature of some mortgages where the remaining monthly payments are recalculated based on a new amortization schedule. During a mortgage recast, the borrower pays a large sum, usually a minimum of $10,000, toward their principal balance. The lender then reamortizes the loan with the smaller balance and new, lower monthly payments. The loan's term, interest rate, and duration remain the same. Recasting is a good option for those who come into a windfall, such as an inheritance or work bonus, and want to pay a large portion of their mortgage principal. It is a simple process that does not require a credit check, home appraisal, or closing costs, and it can help lower monthly payments without changing the interest rate.

Refinancing

Mortgage refinancing, on the other hand, involves taking out a completely new mortgage with a new rate and possibly a new term, and using it to pay off the old mortgage. Borrowers typically refinance to obtain a lower interest rate, shorten the term of their mortgage, convert from an adjustable-rate mortgage to a fixed-rate mortgage, or tap into their home's equity to finance a large purchase or consolidate debt. Refinancing can be costly, as it often requires applying for a new loan and paying closing costs. It may be the preferred option if current market interest rates are lower than the rate on the original loan.

The advantages and disadvantages of recasting a mortgage

Recasting a mortgage is a strategy that allows borrowers to pay a large lump sum towards the principal balance of their loan to reduce their monthly mortgage payments and save on the interest paid over the life of the loan. While recasting a mortgage has its benefits, it also has some drawbacks.

Advantages of recasting a mortgage:

• Unlike refinancing, recasting a mortgage is relatively inexpensive and easier to do. While refinancing requires paying closing costs and appraisal fees, recasting typically involves a small flat-rate recasting fee.
• Recasting does not require a closing process, avoiding the thousands of dollars that tend to go along with it.
• There are no credit score requirements or appraisal requirements for recasting.
• Recasting allows borrowers to keep their existing loans and interest rates.
• Recasting can help borrowers save money on their monthly mortgage payments.

Disadvantages of recasting a mortgage:

• Recasting may not be an option for all loan types. For example, you typically cannot recast an FHA loan, VA loan, or USDA loan.
• Some lenders may charge a fee for recasting, and this fee can vary.
• Recasting may not be the best option if you have other debt with a higher interest rate than your mortgage. In this case, it may be more beneficial to pay the minimum on the mortgage and focus on paying down the higher-interest debt.
• If you don't pay off the mortgage early, you may end up paying more interest overall, even if monthly interest payments are lower.
• Recasting does not change the repayment term length or interest rate. If borrowers are looking to make significant adjustments to these conditions, refinancing may be a better option.

How to decide between recasting and refinancing a mortgage

Deciding between recasting and refinancing a mortgage depends on your financial situation and goals. Both options can help you save money on your mortgage, but they work differently. Here's how to decide which option is best for you:

Recasting a Mortgage:

Recasting a mortgage is a good option if you want to keep your current loan but lower your monthly payments. It involves making a large lump-sum payment towards the principal balance of your loan. This reduces the amount you owe, and your lender will then reamortize the loan with a new, lower balance. As a result, your monthly payments decrease, but your interest rate and repayment term remain the same. Recasting is a good strategy if you have a large sum of money to put towards your loan but are unsure about your future income. It's also less expensive than refinancing, as you typically only pay a small flat-rate recasting fee with no closing costs. Additionally, there are no credit or appraisal requirements, and you can keep your current interest rate. However, recasting may not be an option for certain types of mortgages, such as FHA, VA, or USDA loans. Most lenders require a minimum payment towards the principal (usually $10,000) to qualify for recasting.

Refinancing a Mortgage:

Refinancing a mortgage involves applying for a new loan to pay off your existing one. This can help you secure a lower interest rate, switch from an adjustable-rate to a fixed-rate mortgage, or access cash from your home equity. Refinancing can lead to lower monthly payments and reduce the overall cost of your loan. However, it may be more expensive upfront due to closing costs, which can range from 2% to 5% of the loan amount. Additionally, refinancing may require a home appraisal and a strong credit score. If you're considering refinancing, it's important to run the numbers and use a mortgage calculator to compare your potential savings.

Factors to Consider:

When deciding between recasting and refinancing, consider your financial goals and circumstances. If you have a large sum of money and want to lower your monthly payments without changing your interest rate or loan term, recasting may be a good option. On the other hand, if you're looking to reduce your interest rate, access home equity, or switch to a fixed-rate mortgage, refinancing is the way to go. Additionally, if you're thinking about recasting, ensure you have an emergency fund and consider your future financial needs, such as retirement or career changes. Consulting a financial advisor can help you make an informed decision, as investing your money may be more beneficial in certain situations.

Frequently asked questions