Homeowners who want to shave off dollars from their monthly mortgage payment, as well as save money on interest, might consider a mortgage recast. This strategy won't help you pay off your mortgage early, but it can make your monthly payments more manageable while reducing the amount you'll pay in interest.
What Is a Mortgage Recast?
A mortgage recast, also called a loan recast, is a feature of some types of mortgages where remaining monthly payments are recalculated based on a new amortization schedule. During a mortgage recast, the borrower pays a large sum toward their principal, and their mortgage is then recalculated based on the new, lower balance outstanding.
Some mortgages have a scheduled recast date, which is the date when the lender will calculate a new amortization schedule based on the mortgage's remaining principal balance and term.
How a Mortgage Recast Works
For the borrower, the primary benefit of recasting a mortgage is to reduce monthly payments. Often, a mortgage lender will simply reduce the term of a loan if extra principal payments are made, but maintain the same fixed monthly amount due—simply by increasing the principal amount and reducing the interest portion of the payment.
Recasting can lower the amount of interest the borrower will pay over the life of the loan if a sufficiently large principal payment is made, reducing both the interest and principal remaining on the loan's new monthly payments.
Mortgage Recast Calculator
To calculate the terms of mortgage recast, you will need to have a few numbers ready: the remaining balance of your loan, the number of months left, and the interest rate. By looking at these factors, you will get a better idea of how your existing mortgage payment could change. Several useful online recast calculators can help you get a better idea of how your payments could change. For example, this mortgage recast calculator allows homeowners to insert each variable and get a better idea of their new payments.
Example Of Recast Mortgage
On the surface, the mortgage recast process can be confusing to those who are unfamiliar with it. Therefore, instead of convoluting the concept with arbitrary numbers, it's probably better for many people to look at a real-world example. Let's say you are locked into a 30-year fixed-rate mortgage at 4.99% with a remaining balance of $200,000. In this particular scenario, monthly payment obligations are approximately $1,072.43. That said, you are also fortunate enough to have saved up $40,000, not the least of which you intend to put towards your mortgage principal. In doing so, you can reduce your remaining balance from $200,000 to $160,000 almost overnight. Immediately after the lump-sum payment and a subsequent mortgage recast, monthly payments would drop to somewhere in the neighborhood of $870.81. The recast mortgage process will have had homeowners trade their $40,000 for a discount of $201.62 each month.
How To Qualify For Mortgage Recasting
The recast mortgage process has proven to be an invaluable tool for many homeowners. Unfortunately, however, mortgage recasting isn't made available to all homeowners. Mortgage recasting isn't universally offered by all lenders, nor are all mortgages eligible. Therefore, let's take a look at what you might need to qualify for mortgage recasting:
- Many lenders require a minimum lump-sum payment of at least $5,000. However, others lenders will require the payment to represent a percentage of the remaining principal.
- More often than not, participating lenders will require homeowners to have a certain amount of equity in the home before they can even consider a mortgage recast.
- Mortgage recasting doesn't work on government-backed loans.
- Most jumbo loans don't qualify to be recasted.
- A great deal of lenders will require a clean history of timely payments.
Types Of Mortgages That Can Be Recast
As mentioned before, not all mortgages can be recast. Due to current restrictions and rules, neither FHA, USDA or VA loans can be recast. On top of that, most jumbo loans do not qualify for the mortgage recast process. There are, however, two specific types of mortgages than can be recast:
- Negative Amortization Loans
- Option Adjustable-Rate Mortgages (Option ARM)
Negative Amortization Loans
Not only can a negative amortization loan qualify for recasting, but the terms of the recast can be written into the terms of the loan. More specifically, the payment structure of a traditional negative amortization loan permits borrowers the ability to schedule a payment that is less than the loan's interest charge. The small payment creates deferred interest, which is then tacked on to the loan's principal balance. Since the incremental payments increase the principal, the nature of negative amortization loans requires a recast to officially pay off the debt.
Option Adjustable-Rate Mortgages (Option ARM)
Option adjustable-Rate mortgages (Option ARM) are the same as negative amortization loans, only borrowers are given the option to pay off all of the loan's balance and interest or just some of the interest. Consequently, option ARMs are more flexible than their negative amortization loan counterparts. Still, there's a chance the borrower ends up with more debt in the long run because of fluctuations in interest rates.
Mortgage Recast Vs. Refinance
If you find yourself ineligible for a recast mortgage, or it simply will not benefit your situation, another option to look into is refinancing. Refinancing describes a process where you replace your primary mortgage loan with a new loan. By taking a new loan, often with a different lender, you can take advantage of a different loan term and interest rate. Some of the advantages and disadvantages of refinancing are discussed below.
Pros Of Refinancing
Refinancing differs from a mortgage recast in that it often allows for a reduced interest rate in addition to lower monthly payments. Homeowners typically turn to refinancing under similar circumstances to a recast mortgage. Depending on the loan to value ratio, refinancing can benefit homeowners greatly by leading to a decreased interest rate. Further, you might even pay off your loan faster or spend less over the life of the loan. Cashing out on some of your equity can also help you cover some of your expenses.
Cons Of Refinancing
On the other hand, there are a few trade-offs to consider when looking into refinancing as an option. Refinancing will typically restart the time frame for the mortgage. It could result in a longer amount of time for the loan to be paid off and consequently could result in more interest paid over time, despite the lower interest rate. Refinancing will also result in closing costs, including appraisal fees and more. These will vary based on your lender, although the costs associated with refinancing are typically higher than a recast mortgage. Check out more information on refinancing to determine whether or not this strategy will be right for you.
Recast Mortgage Pros & Cons
While the recast mortgage process has helped countless homeowners reduce their monthly payments, borrowers must weigh the pros and cons themselves. Everyone's financial situation is different, and it's not until you can look at each benefit and drawback that you will be able to tell if the recast mortgage process is right for you.
Pros Of Recasting Mortgage
There are numerous pros to a recast mortgage, all of which may be appealing to homeowners (particularly as they approach retirement). Here are a few of the benefits that may make a mortgage recast worth considering:
- Lower Mortgage Payments: By making extra payments and recasting your mortgage, you can decrease your minimum payment moving forward. This is great for homeowners looking to use that extra money to invest or add to their savings. The timeframe of the original mortgage will remain the same, meaning you do not have to add time to your loan.
- Simplicity: As you look into how to recast a mortgage, you may notice it is often much simpler when compared to refinancing a mortgage. Homeowners often need to meet eligibility requirements and meet with a lender to do so. The simplicity involved is great for homeowners looking to change the terms of their mortgage without re-qualifying for a loan.
- Keep Your Interest Rate: Recasting a mortgage involves using the existing loan balance and the time frame left on the mortgage, and therefore will not change the interest rate. For homeowners with a favorable interest rate, a mortgage recast represents the opportunity to benefit from lower mortgage payments while keeping the same interest rate.
Cons Of Recasting Mortgage
While there are numerous benefits to recasting a mortgage, the process can also have a few cons that homeowners should be aware of. Mind due diligence and consider the following factors before deciding on a recast mortgage:
- Higher Mortgage Payments: It is possible for a mortgage recast to actually increase your monthly payments. This can occur when homeowners make low monthly mortgage payments and are required by lenders to recast the mortgage. While uncommon, these situations can and do occur.
- Fees: There are fees involved in recasting a mortgage. These will vary depending on your lender, but homeowners should expect to pay anywhere from $0 to $500. While the fee may be small, it is important to weigh the benefits of a lower payment when considering recasting a mortgage.
- Minimum Payments: Many lenders will require a minimum lump-sum payment in order to qualify for a mortgage recast. If you have been making extra mortgage payments over time, you may not be affected by this. However, if a lump sum is necessary, homeowners should pay careful attention to how it affects their finances.
Mortgage Recast Vs. Principal Payment
The nature of a mortgage recast will require borrowers to make at least one large payment to their principal ahead of schedule. However, it is worth noting that the addition of a single lump-sum payment doesn't initiate the mortgage recast process. It is entirely possible to make a large payment ahead of schedule without recasting the mortgage. A large payment (above and beyond monthly mortgage obligations) can place borrowers ahead of schedule, but it won't change the schedule at all. Monthly payments will remain unchanged, despite the extra installment. On the other hand, a mortgage recast will simultaneously change the amortization schedule and the amount the borrower is expected to pay each month.