Homeowners who want to save money on their home loan might want to consider options such as a mortgage recast. You’ll be able to pay less overall in interest costs and even cut down on the number of monthly payments.
For those who don’t have cash flow issues — meaning you have money left over after paying your monthly obligations — making extra payments might make a lot of sense. Making a lump-sum payment toward your mortgage principal will help you get debt free a lot sooner.
However, is recasting your mortgage the best choice? Here’s what you need to know before you reamortize.
What Is A Mortgage Recast?
A mortgage recast is when you make a lump-sum payment toward the principal balance of your loan. Your lender will then reamortize your mortgage — your loan will now have a new (lower) balance. The idea is that you can lower your monthly payments since your principal went down, but your interest rate and term remain the same.
Most commonly, homeowners recast a mortgage once they’ve purchased a new home but haven’t sold their old one. Once the previous property has been sold, then the homeowner can use the proceeds of the sale toward their new mortgage.
A recast is also an option for those who receive a large amount of money and desire to lower their mortgage expenses. For example, a homeowner receives an inheritance or a large bonus from work.
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How Does Mortgage Recasting Work?
The specifics can vary by lender, but here are the steps you can expect:
- Make a payment. You’ll need to make a large lump-sum payment to a lender – typically a minimum of $5,000, though check the fine print to make sure. This money goes toward your loan’s principal balance and reduces the amount you owe.
- Lender amortizes loan. Amortization is a fixed repayment schedule that includes both the principal and interest.You pay back your loan over a set amount of time. Lenders may provide an amortization chart showing you how your payments will change throughout the lifetime of your loan. Once you make a lump-sum payment, the lender will then adjust the repayment schedule to reflect your new monthly dues. There’s an example amortization chart further down the article if you want to see a breakdown of how to calculate a mortgage recast.
- Servicing Fees. Many lenders charge a servicing fee for loan recasting. They typically aren’t more than a few hundred dollars, but for specifics you’ll want to contact your lender.
Again, recasting only lowers the amount you pay each month, it doesn’t reduce your mortgage term.
How Do I Qualify For Mortgage Recasting?
Not all lenders offer mortgage recasting and not all types of mortgages are eligible.
Here’s what you need to qualify for a mortgage recast:
- You must not have a government-backed loan. You can’t recast an FHA, USDA or VA loan under the current government rules. Most jumbo loans are also excluded from recasting. You’ll need to refinance your loan if you’re looking to change the terms of these types of mortgages.
- Your current lender must offer recasting. Not every lender offers recasting. Contact your lender and ask if it’s even an option.
- You must meet minimum principal reduction standards. Most lenders require a minimum amount of money before qualifying for a recast (usually $5,000), though it can also be a percentage of your principal. There’s no minimum lump-sum payment required with Rocket Mortgage®.
- You must meet equity requirements. You may need to already have a certain amount of equity in your loan before you qualify for a recast. Again, it can either be a fixed dollar amount or a percentage of your principal balance. Recasting with Rocket Mortgage® may mean that you need to reduce your principal balance by at least $10,000 in the year prior to your recast to qualify.
- You must be able to pay a recasting fee. These fees tend to be much lower compared to refinancing costs. For example, Rocket Mortgage® charges a $250 fee to recast your loan.
- You must meet your lender’s payment history requirements. Your lender might require that you have a history of on-time payments before you can recast. For example, Rocket Mortgage® requires that you have at least two consecutive on-time payments on your current loan before you recast.
Keep in mind that individual standards can vary by lender, so it’s best to check to see what you can qualify for.
Should I Recast Or Refinance My Mortgage?
The good news is that there are plenty of ways to save money on a mortgage, including recasting and refinancing. Both methods will save you money, but their mechanics are different. There are advantages and disadvantages with either choice, so it’s crucial you understand the differences to make a decision that’s best for you.
Recasting Your Mortgage
The following are a few pros and cons to recasting your mortgage.
- Recasting is less expensive. Instead of paying closing costs like you would with a refinance, you typically just pay a small flat-rate recasting fee.
- There are no credit or appraisal requirements. You don’t need to meet credit score requirements to recast your loan. Plus, there’s no need to worry about waiting for an appraisal like you would for a refinance.
- You can keep your current interest rate. A recast can allow you to keep your current interest rate, whereas with a refinance, you usually have to accept the current market rate.
- You can save on interest and lower your payment. A recast can be the perfect solution if you have a large amount of money to put toward your loan, but you aren’t sure how your income will change in the future. Recasting allows you to save on interest without taking on a higher monthly payment.
- You apply your lump sum directly to the principal. Ask your lender if they offer recasting in the event that they don’t allow you to apply the money directly to the principal.
- Your lender won’t allow it. Some lenders don’t allow you to apply extra payments to your loan principal – it’ll go toward next month’s payment instead. Though this will get you ahead on your payment, it won’t save you any money on interest.
- You don’t qualify for a recast. Government programs like FHA and VA loans generally don’t qualify for recasting.
- You need to make a minimum payment amount. Lenders usually only consider a recast if you make a minimum lump-sum payment that’s either a specific fixed amount or a percentage of your principal. Plus, you’ll need to pay a fee.
- You don’t shorten the term of your loan. Your monthly payment will go down, but your term remains the same.
- Reduces liquidity. Your cash will be tied up in your home equity, which means you’ll need to take a home equity loan to access your contributed funds.
Refinancing Your Mortgage
There are benefits and downsides to mortgage refinancing. Here are a few of them.
- You can change your loan. You have the option to change the terms of your loan when you refinance. You can shorten your term, lengthen it, take a lower interest rate and even refinance to a new loan type. For example, to remove insurance, many homeowners refinance their FHA loans to conventional loans as soon as they reach 20% equity. You can’t change anything but your principal when you recast your loan.
- Most mortgages qualify. You can refinance any type of mortgage loan. Refinancing may be your only option to change your monthly payment if you have a government-backed loan or a jumbo loan.
- You can choose a new lender. Unsatisfied with your current lender? You can refinance your mortgage loan with a new one.
- Higher costs. A new loan usually costs more than a mortgage recast. This includes origination fees, appraisal fees and other related closing costs.
- Pay more interest. You technically are starting from scratch when you’re getting a new loan. Usually you’ll pay more in interest in the beginning of your loan, and later more will go toward the principal. Plus, if you refinance to a longer term, you could end up paying more in interest throughout the lifetime of your loan.
How To Calculate Your Mortgage Recast
Your lender should be able to provide you with information, but it’s not a bad idea to calculate a mortgage recast yourself. The easiest solution is to use a mortgage recast calculator, but let’s take a look at how you can calculate it manually.
What you need to do is to look at the date when you intend on making the lump-sum payment then lower your overall loan balance. Then you’ll need to calculate your monthly payment in the remaining years you have on your loan according to the new balance, using the same interest rate.
For example, you have a 30-year fixed rate mortgage on a $200,000 home with a 4.99% interest rate. In this case, your monthly payment would be $1,072.43.
You decide to pay a lump sum amount of $40,000, which brings down your balance to $160,000. Now, your monthly payment goes down to around $870.81, saving you $201.62 each month. It means it’ll save you $45,722.17 in interest throughout the lifetime of your loan. This doesn’t include recasting fees.
To check how much you can save, use our amortization calculator.
A mortgage recast or loan recast is when a borrower pays a large sum toward their mortgage's principal, resulting in the lender recalculating the loan based on the new balance. Your lender will create a new amortization schedule when your loan is recalculated. This means you’ll receive a schedule of loan payments that reveal the principal and interest for each month until your mortgage is paid in full.
Recasting your mortgage means that you can reduce your monthly payments, but the interest and terms remain the same. If you want to save on your mortgage, you can refinance, which means replacing your current loan with a new loan that has better terms. Refinancing allows you to change your loan’s interest rate, term or loan type.
For those who have extra cash and want to put extra payments toward their mortgage, recasting can be a great choice. Reach out to your lender to see whether or not you can qualify.
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