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Homeowners who are looking for a way to lower their monthly mortgage payments without changing their interest rate or loan terms should consider a mortgage recast. Recasting, or reamortizing, a mortgage can create both long-term and short-term savings. Read on to explore the pros and cons of recasting a mortgage, which types of loans can be recast and how to do a recast.
What is a Mortgage Recast?
Recasting your mortgage means you'll contribute a significant amount of cash upfront to pay off part of your debt and spread out the new lower loan amount over the remaining term of your existing loan. Your new monthly payments are reduced through the recasting process because of the lower principal amount remaining. Recasting your mortgage reduces your monthly payment amount but keeps the interest rate and remaining number of monthly payments on your mortgage the same.
For example, say you want to recast a $300,000 mortgage with 20 years remaining on it by contributing $100,000 in cash. The resulting $200,000 principal balance would then be amortized over that same 20-year term. However, the monthly payment would drop from $1,475 to $1,238.
|Months Remaining||240 months||240 months|
It's worth noting that simply making extra payments toward the balance of the loan doesn't qualify as a recast on its own because your monthly payments are not changed. A mortgage recast restructures your monthly payments, which reduces your monthly liability but otherwise keeps all the other terms of your loan intact.
How Do You Recast Your Mortgage Loan?
The process of recasting a mortgage involves the following steps.
- Determine if your loan can be recast. Not all types of loans are eligible to be recast; for example, Federal Housing Administration (FHA) and Dept. of Veterans Affairs (VA) loans cannot be recast. Additionally, not all lenders and servicers offer recasting services, so it is best to inquire with yours directly.
- Notify your loan servicer. You will have to make a formal request to your lender or loan servicer to recast your loan. Most lenders and servicers charge a fee of up to $500 for processing the recast.
- Make a lump-sum payment. In order to complete a recast, most lenders and loan servicers require that you make a minimum lump-sum payment toward the principal balance of the loan. Minimum payments vary from $5,000 to $10,000 or may be calculated as a percentage of the remaining principal balance, which can be as high as 10%.
On occasion, lenders will also need approval from the investor that purchased the loan to complete the recast. This is usually only the case if the loan was transferred to another party since it was brokered. As a result, it may take weeks to process your recast. It's important to continue making your regularly scheduled payments in full until you receive confirmation that the recast is complete.
What Are the Pros and Cons of Recasting Your Mortgage?
The greatest benefits to recasting a mortgage are lowering the monthly payments and reducing the interest you'll pay over the life of the loan. You also won't need to refinance or requalify for the mortgage, which means you'll avoid paying lender fees, appraisal costs, and title and escrow fees that are typically part of the refinance process. Additionally, the annual percentage rate (APR) will stay the same, which is a benefit if you already have a low interest rate.
The biggest drawback of recasting a mortgage is that it doesn't shorten the term of the loan. Depending on how much you're required to pay down the balance, recasting your mortgage also reduces your overall liquidity (i.e., cash on hand) because contributed funds will be tied up in the equity of the home. Borrowers who want to access the cash will need to use home equity financing or sell the home. Finally, most lenders and servicers charge a nominal processing fee for recasting loans.
What Types of Loans Can Be Recast?
While most lenders and loan servicers don't publicly advertise whether they allow mortgage recasts, certain loans simply aren't eligible for recasts and some lenders won't permit them.
|Home Equity Loans||Yes|
Home equity lines of credit (HELOCs) will automatically be recast at the end of the initial draw period on the loan based on your outstanding loan balance. Typically, when the 10-year draw period ends, the loan is recast into a 10-, 15- or 20-year fully amortizing loan, depending on the terms of your agreement.
Recasting vs Refinancing Your Mortgage
When trying to reduce your monthly payments, the majority of borrowers will need to decide between recasting or refinancing their existing home loan. While a mortgage recast may not always be an option, a mortgage refinance is a valid alternative, depending on where interest rates are.
Should You Recast Your Mortgage
There are key differences between recasting and refinancing a mortgage, even though both options can decrease your monthly payments. Recasting your loan is an easier process than refinancing because it only requires lender approval, a lump-sum payment and a processing fee. You'll avoid credit checks or new underwriting, and the administrative fee will be significantly lower than the closing fees incurred through a refinance. You'll also keep the original interest rate on your mortgage. Before recasting your mortgage, remember to consult with your tax preparer or CPA to determine the tax impact.
Here's when you should consider recasting your mortgage.
- You receive a lump sum of money. Applying this windfall to your mortgage helps lower your monthly payments, which allows you to keep more cash in your pocket every month.
- You've purchased a new home before selling your old home. Once the sale of your old home is complete, you can apply the proceeds toward your new mortgage without the need to refinance.
- Refinancing isn't a good option for your situation. This could be due to a change to your income, assets or credit profile that prevents you from qualifying for a new loan. This can also be the case in a rising interest rate environment, where it's impossible to refinance at a lower rate than your current mortgage.
Should You Refinance Your Mortgage Instead?
Refinancing will require you to apply for a new loan with a different structure, amortization schedule and interest rate. This requires a formal application and underwriting, and the lender will perform a new credit check. You'll also need to pay the fees and closing costs associated with creating a new loan.
Here's when you should consider refinancing your mortgage.
- You don't have a lot of cash available. You won't need to make a lump-sum payment toward the principal balance of the loan to complete a refinance. While many refinancings will require additional closing costs, some lenders allow you to roll those closing costs into your new mortgage balance.
- You need to take cash out of your home's equity. Undergoing a cash-out refinance will allow you to combine and consolidate debts while drawing cash out of your home, provided that you have enough equity outstanding.
- You can get a better interest rate or loan structure. Refinancing allows you to take advantage of low interest rates and allows you to shorten the term on your loan.