Homeowners looking to lower their monthly mortgage payments often consider refinancing, but a loan recast could be the better choice in some cases. Mortgage recasting involves paying off a large portion of your principal and then the lender adjusting your payment schedule based on the remaining lower balance. A recast reduces your monthly payments and total interest charges, and it is simpler than a refinance.
[Read: Best Mortgage Refinance Lenders.]
What Is Mortgage Recasting?
A mortgage recast, or loan recast, is an arrangement with your lender or loan servicer to apply a large amount of cash toward your principal. The lender then recalculates your mortgage payments based on the new lower balance. The recast will naturally lower your payments, and you won’t need a new loan with new terms.
“It’s becoming popular again for two reasons,” says Kris Shenton, loan officer with First Home Mortgage. “One, rates are up, and refinances won’t help in a situation where your present mortgage rate is lower than the current market rates.”
Recasting is also helpful if you buy a new home before you sell your old one. You may want to sell your home and use the proceeds as a down payment on a new property, but the timing doesn’t line up — especially in a competitive market, Shenton says. Instead, you might close on the new home, sell the old home and use the income to recast your mortgage.
How Does Mortgage Recasting Work?
The basic steps of mortgage recasting are:
Contact your lender or loan servicer. Make sure recasting is available from your lender or loan servicer and for your loan type.
Find out how much cash you need. Lenders usually require a lump-sum payment of at least $5,000 to recast a mortgage and typically charge administrative fees.
Ask about administrative fees. Fees vary by lender and are usually a few hundred dollars but are outweighed by potential interest savings. You’ll receive a lower monthly payment and pay less interest over the life of the loan.
Shenton provides an example of how recasting may affect a mortgage payment. Let’s say you started with a $200,000 home loan at an interest rate of 4%, and 10 years into the loan, your balance is $160,325. If you pay $20,000 to recast your mortgage at that point, then you will shave $106 from your monthly mortgage payments and save $25,518 in total interest.
Get your new payment schedule. The lender adjusts your payment schedule, also called the amortization schedule, based on the reduced balance and calculates a new monthly payment. Your loan term and interest rate stay the same.
If you are three years into the loan and recast, the lender will recalculate the remaining balance on a 27-year amortization, Shenton says. “You are not adding three years to the repayment as you would if you refinanced to a new 30-year loan,” he says.
[Compare: Mortgage and Refinance Rates in Your Area.]
How to Qualify for Mortgage Recasting
“Although each servicer may have their own specific rules” about recasting, says Michael Brown, home loan specialist with Churchill Mortgage, these guidelines can give you an idea of how to qualify for mortgage recasting:
Mortgage type. You typically can’t recast government-sponsored loans, which include mortgages insured by the Federal Housing Administration, U.S. Department of Agriculture or U.S. Department of Veterans Affairs. Most jumbo loans, which are mortgages that exceed conforming loan limits, are also excluded from recasting.
Lump sum of cash. Borrowers may need to pay a minimum amount to qualify. You are usually required to put at least $5,000 toward the principal or a percentage toward the loan balance, Brown says, such as 10%. That means you would need at least a $20,000 payment to recast a loan with a $200,000 balance.
Administrative fee. You may need to pay your loan servicer a fee for mortgage recasting. The fee usually ranges from $250 to $500, though some lenders waive it, Brown says. For instance, Chase Bank doesn’t charge this fee, says Ashley Moore, community lending manager with Chase Home Lending.
On-time payment history. Lenders may want to see six or 12 months of on-time payments before they recast, Shenton says. “But since you are giving the bank money and lowering your payment, most only care that you are current on the payments to do a recast,” he says.
Equity requirements. Your loan servicer may expect you to have a certain amount of equity in the home. It may be either a fixed dollar amount or a percentage of the principal balance.
Time frame. You may need to wait a minimum period after closing on a loan, about 90 days, before you can recast, Brown says.
Could Mortgage Recasting Be Right for You?
Consider recasting your mortgage if you:
Have the cash for it. A mortgage recast can be a good fit “for any customer who has the ability to apply a large sum of money toward their balance if their goal is to reduce the monthly mortgage payment,” Brown says. Just make sure you won’t need the cash for anything else, such as investments or emergencies. “Once you send money to a bank, it’s harder to get that money back if you ever needed it or wanted it back,” Shenton adds.
Don’t want to use a home sale contingency. Recasting can be a good option if you want to buy a new house without making the purchase contingent on selling your current home. “In this very competitive housing market, most sellers do not want to hear the word ‘contingency,'” Brown says. Once you sell your home, you can take the proceeds and apply them toward the new mortgage to reduce the payments.
Want to keep your original loan terms. If your original mortgage has a low interest rate, then recasting makes sense rather than refinancing. A mortgage recast doesn’t involve taking out a new loan with new terms, which means you can keep your low interest rate. You also save on closing costs for a new loan.
Need to reduce your monthly payments. Recasting your mortgage can lower your monthly payments if you qualify and have enough cash to do one. Locking in a lower payment could make sense before a big life change, such as retirement.
Pros and Cons of Mortgage Recasting
— Your monthly mortgage payment decreases.
— The lender doesn’t perform a credit check.
— You won’t pay closing costs.
— A home appraisal isn’t needed.
— The administrative fee is relatively low.
— You keep the interest rate, which is an advantage if it’s low.
— Not all lenders and servicers allow recasts.
— You can’t shop around for the best lender or fee. Only the company that services your loan can do the recast.
— Your loan type may not qualify.
— You’ll need to come up with a large lump-sum payment.
— The money used for the payment won’t be available for other purposes, such as investing.
— Lenders charge an administrative fee.
— Your loan’s interest rate doesn’t change, which is a disadvantage if it’s high.
— The loan term doesn’t change.
[Read: Best Home Equity Loans.]
Mortgage Recasting vs. Refinancing
The key difference between mortgage recasting and refinancing is that recasting doesn’t involve taking out a new loan, meaning that your terms won’t change.
“A refinance requires the customer to go through the whole loan process again,” Brown says. “With a refinance, you are risking taking on a higher interest rate … and the closing costs are considerably higher.”
Additionally, a lender orders a home appraisal and checks your credit score, debt-to-income ratio and employment status when refinancing. None of these are done with a recast.
Both a refinance and a recast involve fees, but they’re much lower with a recast. When refinancing, homeowners can expect to pay 2% to 3% of the loan amount in closing costs, which won’t add to your home equity.
Lenders may charge nothing up to $500 to recast, and the lump sum used to reduce the principal directly increases your home equity. A recast typically involves more money upfront, but most of it benefits the homeowner.
|Mortgage Recast||Mortgage Refinance|
|Not taking out a new loan, so your terms won’t change.||Taking out a new loan, so your terms can change.|
|Comes with an administrative fee, typically up to $500.||Comes with closing costs, which average 2% to 3% of the loan balance.|
|Need a lump sum of at least $5,000 to apply toward the principal.||Not required to apply a lump sum toward the principal.|
|No home appraisal.||Lender will order a home appraisal.|
|No financial check.||Lender will run a full check on your credit history, employment status and debt-to-income ratio.|
|Government-sponsored loans won’t qualify for a mortgage recast, and some loan servicers won’t do them.||Most mortgages qualify for a refinance.|
|Helps you save on interest.||Borrower may pay more in interest.|
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