A mortgage recast is a unique way to lower your monthly mortgage payment without having to refinance your loan.
With a lump sum payment that is applied to the principal balance of your mortgage. The loan is then re-amortized based on the new lower principal balance resulting in lower monthly payments.
First you need to make sure your mortgage lender offers mortgage recasting. Most larger lenders like Wells Fargo or Bank of America does offer it.
A small fee, usually less than a few hundred dollars is charged to recast a loan.
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Mortgage Recast Pros
- Lower monthly mortgage payments
- Quick and simple process not requiring a ton of paperwork or income verification
- No credit check required
- Available on most loans owned by Fannie Mae or Freddie Mac
- Increased cash flow
Mortgage Recast Cons
- Loan will not be paid off early
- May increase interest paid over the course of the mortgage
- Most lenders charge a small mortgage recast fee
- $5,000 minimum lump sum payment required
- Not available on Government backed home loans
- Reduction in savings
How a Mortgage Recast Works
For example, let’s say you have a mortgage with a principal balance of $350,000 and a monthly payment of $1,720. And you want to recast the mortgage and pay a lump sum of $100,000 towards the principal bringing the balance down to $250,000.
Your new loan balance of $250,000 will be re-amortized base on the updated principal balance. The new amortization schedule will lower your monthly payment to $1,229.
In order to qualify for a mortgage recast lenders generally require an up-front payment of at least $5,000.
Loan recasting is not available for Government loans, such as FHA loans and VA loans.
Save in the Short Term
When you recast a home loan the interest rate stays the same however, since the principal balance is lower you pay less interest, and reduce your monthly payment.
But since the loan is restructured you may pay more interest over the life of the loan.
If you were to just apply that the payment to your principal balance your mortgage payment stays the same, but you will payoff the loan early. So in the short term it will save money on your monthly payment, but can end up costing more over the course of the loan.
Refinance vs Recast Mortgage
If you’re trying to lower your mortgage payments you have two options, refinance the loan, or a loan recast. Refinancing is the only way to lower the mortgage rate, or extend, or shorten the loan term.
When you refinance you’re getting a new loan that replaces the existing loan. A mortgage recast is simply a re-calculation of amortization schedule.
Recasting your mortgage is a great way to lower your payments if you have a sizable payment, or have been making extra mortgage payments, or bi-weekly payments.
Refinance – A mortgage refinance comes with heavy fees for origination and closing costs. Expect to pay between 1%-3% of the loan amount in fees when refinancing your mortgage.
Recast – Generally lenders charge a small fee of less than $500 to recast a mortgage. It is definitely the cheapest option of the two.
Refinance – Qualifying to refinance a mortgage has the same requirements of getting a new mortgage. A mortgage lender will check your credit, verify income and assets, check your debt-to-income ratio, and a home appraisal is required.
Recast – The requirements to recast a loan are very minimal. No credit check or income verification is performed. The main requirements are that your mortgage balance should be at least $5,000 lower than where the amortization schedule shows, and you must not have any late payments within the past 12 months.
The Bottom Line..
If you have a large payment to put towards your loan a mortgage recast is a great way to lower your monthly payments.
However, in the long term it may cause you to pay more interest.
If you were to pay extra on your loan and not recast the mortgage your loan will be paid off early, and you’ll save on interest, but your mortgage payment will not change.
Make sure you know exactly what a mortgage recast will do first. Contact your lender to discuss the advantages and drawbacks of recasting your loan.
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