A Guide On How To Recast Your Mortgage

If your monthly mortgage payments are higher than you’d like – or you’d simply prefer to use some of that money elsewhere – you have several options. One of the simplest options available to help you reduce your mortgage payments is a mortgage recast. You won’t have to apply for a new loan, and you can keep your current interest rate and loan term.

Are you wondering whether recasting your mortgage is right for you? Keep reading to learn how it works, the difference between recasting and refinancing and the pros and cons of a recast mortgage.

What Is A Mortgage Recast?

A mortgage recast happens when the borrower makes a large, lump-sum payment towards the principal balance of their mortgage. Then, the lender reamortizes the loan based on the new, lower balance. The interest rate and loan term remain the same, but the loan balance and monthly payment are reduced.

Here’s an example:

For simplicity’s sake, let’s say you have a loan with a remaining principal balance of $300,000 and an interest rate of 5% and your current monthly payment is $1,610. You decide to recast your mortgage and make a lump-sum payment of $50,000. Your new loan balance is $250,000. Your lender uses that amount ($250,000) and your current interest rate (5%) to reamortize your loan over the remaining term. As a result, your new monthly payment is lowered by hundreds of dollars.

How A Mortgage Recast Works

The process of recasting a mortgage might look a bit different from one lender to the next. But generally speaking, they all follow the same basic steps.

1. First, you’ll contact your lender. Ask if they allow mortgage recasting and what requirements you’ll have to meet to do one.
2. Next, you’ll make a lump-sum payment. Lenders often have a minimum payment you must make to recast – usually $5,000 – which is applied to your principal balance.
3. After that, your lender will reamortize your loan. In other words, they use your new principal balance and current interest rate to reamortize your loan over the same term. Because you’ll be paying off a smaller amount over the same number of years and at the same interest rate, your new monthly payments will be lower.
4. Finally, the lender will charge you servicing fees. These fees are usually a few hundred dollars, so considerably lower than the closing costs you’d pay to refinance your loan.

Remember that recasting your mortgage can take between 45 and 60 days. During that time, it’s important that you continue to make your mortgage payments. Failing to do so could result in a late payment, which could disqualify you from recasting your mortgage altogether.

Qualifying For A Mortgage Recast

Unfortunately, mortgage recasting isn’t available to all borrowers. Some lenders don’t offer recasting at all, while others have certain requirements that borrowers must meet. Here are a few qualifications you’ll generally have to meet to recast your mortgage:

• Minimum payment amount: As we mentioned, most lenders require that you make a minimum lump-sum payment to qualify for a mortgage recast. In most cases, that minimum payment is around $5,000.
• Minimum equity amount: Some lenders may require that you have a certain amount of equity built up in your home before you’re able to recast your mortgage. The minimum may be either a percentage of the principal balance or a fixed dollar amount.
• Payment history: In most cases, lenders require that you be up-to-date on your mortgage to recast it. In some cases, you may need a certain number of consecutive on-time payments or have no late payments within the past year. You may also not be able to recast brand new mortgages until you’ve made a certain number of monthly payments.
• Loan type: Mortgage recasting is available for conventional conforming loans but can’t be used for government-backed loans like FHA loans or VA loans.
• Recast fee: As we mentioned, there’s often a fee required to recast your mortgage. This fee is usually around $250 but could vary from lender to lender.

When To Make A Mortgage Recast

The primary benefit of a mortgage recast is that it gives you the opportunity to lower your mortgage payment without having to refinance your loan.

One situation where recasting your mortgage might make sense is if you want to allocate some of your monthly budget toward another purpose. Yes, you’ll have to make one large payment now, but after the initial lump sum payment, you’ll save money each month for the remainder of your loan term. And that extra money saved in the future could be used for any other financial goal.

Another situation where recasting your mortgage might make sense is if you purchased your current home before you were able to sell your old one. Because you hadn’t sold your old home yet, you weren’t able to make a large down payment, which meant you were stuck with a higher monthly payment. But once you sell the old home, you can use the proceeds of the sale to make a lump-sum payment and recast your mortgage.

Additionally, a mortgage recast could be a great option if you’re planning to retire soon. Many retirees want as low of a housing payment as possible. If you have the money to do so, you could make a large payment on your mortgage and then enjoy a lower monthly payment during retirement.

Unfortunately, a mortgage recast often isn’t a good option if you’re having difficulty affording your payments. In that case, there’s a good chance you don’t have a large sum of money to make a lump-sum payment. And if you’re facing financial hardship, that lump-sum amount might be better spent elsewhere.

Recast Vs. Refinance

A mortgage recast is one way to lower your monthly payment, but it’s not the only way. Another option that many homeowners turn to is a mortgage refinance. When you refinance your mortgage, you take out a new home loan to replace your current one. The new loan fully pays off your existing loan, and then you’ll make payments on your new loan moving forward.

Unlike recasting, refinancing your mortgage doesn’t allow you to keep your current interest rate or mortgage term. Instead, you’ll choose a new term – usually 15 or 30 years – and will get a new interest rate based on your creditworthiness and the current market interest rate. If your credit has improved or rates have declined since you originally took out your mortgage, your interest rate could decrease.

Refinancing your mortgage can help you lower your monthly payment in a couple of ways. First, if interest rates are lower, your monthly payment will be reduced because you’re paying less in interest.

Additionally, refinancing your loan allows you to choose a new loan term. Let’s say you currently have 20 years left on your mortgage. You could choose to take out a new 30-year loan, which would spread out your balance and allow for lower payments.

Finally, if you’ve surpassed 20% equity in your home, refinancing could allow you to remove mortgage insurance from your monthly payment.

Of course, refinancing has some downsides as well. First, there’s no guarantee you’ll get a lower interest rate on your loan. If your credit score has decreased or market rates have increased, your interest rate could increase considerably. Additionally, refinancing comes with closing costs that could amount to thousands of dollars. As a result, there aren’t any short-term savings.

Calculating Your Mortgage Recast

When you recast your mortgage, your lender takes your new principal balance and your current interest rate and reamortizes it across your current loan term. So if you currently have 25 years left on your mortgage, your loan will be reamortized over that same 25 years.

Let’s say you have a mortgage balance of $250,000 with an interest rate of 5% spread out over that 25-year loan term. If you recast your mortgage and make a $50,000 lump-sum payment, the lender will reamortize the loan to spread $200,000 with an interest rate of 5% out across 25 years. Because the principal amount is lower, the monthly payments will also be lower.

In addition to having lower monthly payments, you’ll also end up paying less interest each month – and over the long-term – since that interest rate is being applied to a smaller loan amount.

If you want to get an idea of how a recast could affect your mortgage payments, consider using an online amortization calculator to help you.

Pros And Cons To Recasting Your Mortgage

Recast Mortgage Pros

• Recasting your mortgage can lower your monthly payment and save you money in interest over the life of your loan.
• Unlike with a mortgage refinance, you won’t have to apply or qualify for a new loan.
• You can keep your current mortgage interest rate, which is beneficial if you currently have a low rate.
• Recasting generally has a small fee of around $250 compared to the thousands of dollars in closing costs that are required to refinance.

Recast Mortgage Cons

• Not all lenders allow recasting, and certain loan types are ineligible for recasting regardless of your lender.
• You’ll have to make a lump-sum payment of at least $5,000 to recast your mortgage, which could be used for other financial goals.
• Recasting your mortgage doesn’t shorten your loan term, meaning you aren’t paying it off more quickly.
• If you currently have a high interest rate, recasting doesn’t allow you to lower it.

Recast Mortgage FAQs

Should I recast my mortgage?

Recasting your mortgage might be a good idea if you have a large sum of money you can afford to pay, and you want to lower your monthly payment. It’s an especially attractive option if you have a low interest rate that you’d like to keep.

What types of mortgages qualify for recasting?

Not all types of mortgages qualify for recasting. You can recast conventional conforming loans but can’t recast FHA loans, VA loans or USDA loans.

Is it better to recast a mortgage or pay down principal?

Both recasting and paying down your principal balance will lower your loan amount, but making a large payment toward your principal without recasting won’t lower your monthly payment. However, it could result in you paying off your loan more quickly. It depends on which is more important to you.

What other options are there to recasting my mortgage?

Refinancing is a popular alternative to recasting since it can also lower your monthly payment by potentially lowering your interest rate or allowing you to change your loan term. Other options could include spreading that lump sum out into extra monthly payments to pay off your loan early or having PMI removed from your loan to reduce your payments.

The Bottom Line On Mortgage Recasting

Recasting your mortgage can be an excellent way to reduce your monthly mortgage payment and save you money on interest over the life of your loan. With recasting, you get to keep your current interest rate and loan term, and your new loan balance is simply amortized over your existing loan term. Recasting is an appealing alternative to refinancing, especially in a time when interest rates are high.

Of course, recasting isn’t right for everyone. If you want to change your interest rate or loan term or take money out of your home, a refinance might be a better option. If that is a better option, you can apply for a refinance with our friends at Rocket Mortgage^® today to see if you qualify.