Homeowners who want to lower their monthly mortgage payments often consider refinancing. However, a loan recast could be the better choice. Mortgage recasting involves making a very large prepayment and asking the lender to recalculate your payment based on the remaining loan term. 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 a way to lower your monthly payment without refinancing. First, you make a large extra payment to reduce your principal balance. Then, the lender or loan servicer determines your new payment based on the new, lower balance and the remaining term of your mortgage.
“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?
Run the numbers before recasting. The interest savings should exceed the fees to make recasting worthwhile. You’ll receive a lower monthly payment and pay less interest over the life of the loan.
Assuming that you take out a 30-year, $200,000 home loan at 4%:
— Your payment will be $955
— You’ll owe $157,568 after 10 years.
— Your total interest over 30 years would be $143,739.
— If you pay $20,000 to recast your mortgage at that point, your new balance will be $137,568.
— Your new payment would be $121 less at $834. And you’d pay $9,085 less interest.
[Compare: Compare Current Mortgage Rates]
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. Make sure your mortgage type qualifies for recasting. You can’t recast government-sponsored loans, which include mortgages insured by the Federal Housing Administration, U.S. Department of Agriculture or Department of Veterans Affairs. Many 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 – usually at least $5,000 – toward the principal or a percentage, for instance 10%, toward the loan balance, Brown says.
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.
[Calculate: Use Our Free Mortgage Calculator to Estimate Your Monthly Payments.]
Could Mortgage Recasting Be Right for You?
Consider recasting your mortgage if you:
Have the cash. 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 more sense 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 avoid the 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. If you don’t need to lower your payments, a principal reduction without recasting shortens your repayment period and saves you more money.
Pros and Cons of Mortgage Recasting
Pros
— Decrease your monthly mortgage payment.
— No credit check required.
— No closing costs or home appraisal required.
Cons
— Requires a large lump-sum payment.
— Doesn’t save as much as a mortgage prepayment.
[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.
The typical fee for a recast ($250 to $500) is less than the 2% to 3% of the loan amount that a refinance generally costs. A recast principal reduction 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. Does not lower the interest rate. | May be able to improve the interest rate or other loan terms. |
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What Is Mortgage Recasting? originally appeared on usnews.com
