A mortgage recast is a process where you request that your lender reexamine the remaining principal on your loan. You may choose to do so after making a large lump sum payment or if you’ve consistently paid more than the minimum for an extended time.
The lender will then re-amortize your loan based on the new principal balance but using the same interest rate and the repayment period. Doing so will typically allow you to lower your monthly payment while keeping the same loan terms. But be aware that a mortgage recast must be requested, it isn’t automatic, and your lender may charge a fee for re-amortizing the loan.
If you come into some money from an inheritance or a bonus, or you recently got a raise at work, you may want to use the extra funds to pay down your mortgage. But doing so won’t automatically decrease your monthly payment. Unless you request a mortgage recast, you will continue to pay the rate you agreed upon at the start of the loan until the balance is fully paid off. However, be aware that a mortgage recast will not impact anything beyond your monthly payment, including your interest rate, repayment period, or any other loan terms. Plus, most lenders have requirements for when you can apply for a mortgage recast.
- Don't Have a Government-Backed Loan
- Meet Minimum Principal Reduction Standards
- Meet Equity Requirements
- Meet the Lender's Payment History Requirements
1. Don’t Have a Government-Backed Loan
Government-backed loans typically don’t allow mortgage recast. That includes FHA, VA, USDA, and any other loan backed by the federal government. A mortgage recast is typically only permitted with conventional loans that conform to the standards set by the GSEs. So, jumbo loans often don’t qualify for mortgage recast either. Check with your lender to find out if your loan qualifies if you’re considering a mortgage recast.
2. Meet Minimum Principal Reduction Standards
Most lenders require you to reduce the principal by a significant amount before applying for a mortgage recast. So, don’t expect to pay an extra few hundred dollars one month and then recast your loan. They’ll often require you to hit a certain threshold before you qualify – typically around $5,000.
3. Meet Equity Requirements
Some lenders will require you to have a certain amount of equity in your home before approving a mortgage recast. It may require a certain percentage of the home’s value or a set dollar amount. So, if you’re still in the early stages of homeownership, you may want to wait until a later date.
4. Meet the Lender’s Payment History Requirements
It’s also common for lenders to have payment history requirements as well. So, if you recently missed a payment or two, you may need to wait until you’ve reestablished a positive record before applying for a recast. It’s often better to be consistent than make a large payment only to fall behind.
Keep in mind that recasting your mortgage is different than refinancing. Recasting is when you keep the same loan intact but re-amortize the payment schedule to reflect the new outstanding balance. Refinancing allows you to change the actual loan terms, including the interest rate or repayment period.
Refinancing is basically replacing your existing loan with a new loan, whereas a recast is just a recalibration of your current mortgage. A mortgage recast is typically much cheaper than a full refinancing – lenders usually charge a flat fee of anywhere from $200-$500 for a recast, whereas a refinance usually costs 2-6% of the loan amount. So, keep that in mind if you’re weighing the pros and cons.
- Use a Mortgage Calculator
- Start With Your Current Mortgage
- Calculate Your Recast Mortgage Payment
1. Use a Mortgage Calculator
The easiest way to calculate a mortgage recast is to use a mortgage calculator. You’ll also want to have a few figures handy; the new outstanding balance, the interest rate, and the repayment term.
2. Start With Your Current Mortgage
Say you have a 30-year fixed-rate mortgage at 4% interest. The home is worth $250,000, but you made the full 20% down payment and owed $200,000 in principal at the beginning of the mortgage. That would put your monthly mortgage payment at around $955.
3. Calculate Your Recast Mortgage Payment
But say you came into some money and decided to reduce the principal by $25,000. At 4% interest and an outstanding principal of $175,000, your new monthly payment would be $835. Now that’s assuming you made the lump sum payment before making any regular payments (and the lender allows you to do so). If you’ve already reduced the principal by a considerable amount, just factor the true outstanding balance into your calculation.
A mortgage recast is a good option for those who have gone above and beyond their required obligation and want to enjoy the benefits by reducing their monthly payment. However, it’s important to remember that a recast will not impact the actual terms of the loan, so if you’re looking for a better interest rate or want to make any fundamental changes, you’re better off refinancing.