Mortgage recasting, or loan reamortization, is a smart way to manage your home loan. Say you get some extra money and use it to pay off a part of your loan early. Your lender then recalculates your loan so your monthly payments become smaller while your loan term and interest rate remain the same.
Although a mortgage recast can be a solid solution for managing your home loan more comfortably, this financial strategy may not be for everyone. It’s best to understand how it works and consider its pros and cons to determine if it suits your needs and situation.
What Is Mortgage Recasting?
Mortgage recasting occurs when you make a large payment towards your mortgage. For instance, if you have a mortgage of $200,000 and decide to pay $50,000 toward the principal balance of your loan, you will now owe $150,000. Then, your lender will "recast" your loan, meaning your mortgage will be recalculated based on the new, lower amount you owe without your loan term and interest rate changing.
By recasting your mortgage, you can have more wiggle room in your budget without the hassle or cost of refinancing. And unlike refinancing, your interest rate stays the same, which can be beneficial if rates have increased since you took out your loan.
How Mortgage Recasting Works
Mortgage recasting involves a series of steps to help you lower your monthly payments without changing your interest rate or loan term.
Contact your lender
Reach out to your lender to discuss the possibility of recasting your mortgage. Not all lenders offer this service, and it's typically not available for certain types of mortgage loans.
Your lender will inform you about your eligibility and the minimum amount required for the lump sum payment.
Submit your payment
Make a large, one-time payment towards your mortgage principal to reduce the total amount you owe on your home. The lump sum could come from a bonus, inheritance or personal savings.
Lender recasts your loan
After receiving the payment, your lender recalculates your monthly payments based on your lower mortgage principal while keeping your interest rate and loan term the same.
Lender charges a fee
Your lender may charge you a recasting fee or reamortization fee, which covers the administrative costs associated with recalculating your loan. While the fees vary between lenders, they often range from $200 to $500.
Continue monthly payments
After the recast, you'll continue making the newly calculated lower monthly payments for the remainder of your loan term.
Eligibility Requirements for Mortgage Recasting
Not every homeowner or mortgage qualifies for recasting. The basic eligibility requirements for this option include:
- Type of loan: Typically, conventional mortgages are eligible for recasting. Government-backed loans such as FHA, VA or USDA loans usually don’t allow for recasting.
- Lender’s policy: Not all lenders offer the option to recast a mortgage. It's crucial to check with your lender to see if they provide this service.
- Good payment history: Lenders often require borrowers to have a history of timely mortgage payments before they allow a recast.
- Lump sum payment: To recast a mortgage, you'll need to make a significant lump sum payment towards your mortgage principal. The required amount can vary by lender, but it tends to range between $5,000 and $10,000.
Mortgage Recasting vs. Refinancing
Both mortgage recasting and refinancing have their benefits, so the best choice depends on your financial situation and goals. Recasting might be an ideal option if you have a large sum of money that you would like to put toward your mortgage and want to keep your current rate and term.
On the other hand, if current interest rates are lower than your existing rate or you'd like to change the length of your loan term, refinancing might make more sense. Browse the table below to find out which option is best for you.
Usually available for conventional loans only.
Available for most types of mortgages.
Lump sum payment
Required. Typically a minimum of $5,000 or more.
Can be higher or lower based on current market rates.
Can be extended or shortened.
Lowered due to reduced principal.
Can be higher or lower based on new terms.
Some lenders may charge a fee.
Often includes closing costs.
Pros and Cons of Mortgage Recasting
Generally, mortgage recasting can help homeowners manage their mortgage loans more effectively. But as with any financial strategy, it has its advantages and disadvantages. Understanding them can help you determine whether this option is right for you.
Pros of Mortgage Recasting
- Lower monthly payments: By making a significant lump sum payment towards your principal, the overall loan amount reduces, and so do your monthly payments. This can free up cash for other expenses or savings.
- No extensive credit check: Generally, recasting doesn't require a thorough credit check, which makes it a smoother process if your credit score isn't perfect.
- Retains original loan term: Your loan term remains unchanged after a recast. If you're 10 years into a 30-year mortgage, you'll still be looking at 20 more years, but with lower payments.
- Interest rate remains the same: Your interest rate doesn't change when you recast your loan. This can be advantageous if current market rates are higher than your existing rate.
- Flexibility: Recasting offers flexibility, especially if you've received a windfall or have saved a lump sum amount. It allows you to use that money to reduce your loan balance and monthly payments.
Cons of Mortgage Recasting
- Large lump sum payment: To recast your mortgage, you'll need to put up a substantial amount of money. For some, gathering this lump sum may be challenging and could potentially deplete essential savings.
- Availability: Not all loans are eligible for recasting, and not all lenders offer this option. Government-backed loans like FHA, VA and USDA typically do not allow for recasting.
- No interest savings: While you'll have lower monthly payments, you won't necessarily save on the total amount of interest paid over the life of the loan. If saving on interest is your goal, refinancing might be a better option.
- Tied-up funds: The lump sum used for recasting could be tied up in your home equity, which might not be ideal if you encounter a financial emergency. Having liquid assets can serve as a safety net.
Why Recast Your Mortgage?
Mortgage recasting can be appealing for various reasons, such as lowering monthly payments, avoiding refinancing costs and having financial peace of mind.
- You want to lower monthly payments: The most attractive reason to recast a mortgage is to decrease your monthly payments. Paying a substantial portion of the principal will spread the remaining loan balance over the original term, leading to smaller monthly payments. This can ease budget constraints, providing more room for other expenses.
- You want to avoid hurting your credit score: Mortgage recasting doesn't require a hard credit check. This means it won't impact your credit score, making it an appealing option if you plan to apply for other forms of credit soon.
- You want a larger equity stake: A lump sum payment toward your mortgage means you're building equity in your home faster. More equity can give you greater financial flexibility in the future, including more favorable terms if you decide to refinance or take out a home equity loan.
- You want more room for investments: By lowering your monthly mortgage payments, you may free up funds to invest elsewhere. This could allow you to diversify your investment portfolio and potentially earn higher returns.
- You want financial peace of mind: Reduced monthly payments could decrease financial stress, providing more peace of mind knowing you have extra funds to cover unexpected expenses or to save for the future.
Alternative Options to Mortgage Recasting
Consider other ways to save on your mortgage if recasting isn’t a viable option for you. These include refinancing your mortgage, making extra payments or adjusting your loan term.
- Refinance your mortgage: If the current market rates are lower than your existing rate, refinancing could save you a significant amount over the life of your loan. However, refinancing does come with closing costs, appraisal fees and origination fees, which should be considered before proceeding.
- Make extra payments: Making additional payments towards your mortgage can save you money in the long run. These extra payments go directly toward the principal balance of your loan, reducing the total amount you owe and, consequently, the amount of interest you'll pay.
- Shorten your loan term: If you have a 30-year mortgage, consider switching to a 15-year mortgage. While this will increase your monthly payments, it can save you thousands of dollars in interest over the life of the loan.
- Get rid of PMI: If you made a down payment of less than 20% on your home, you're likely paying private mortgage insurance (PMI). Once you've built up 20% equity in your home, either through payments or home value appreciation, you can request your lender to remove the PMI to reduce your monthly payment.
Frequently Asked Questions About Mortgage Recasting
It’s common to have questions when you’re recasting your mortgage. We addressed some of your concerns below.
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