What is Mortgage Recasting?
You may have heard the term “mortgage recast”, or “recasting a mortgage”, and wondered what it means, and if you could benefit from it. Basically recasting a mortgage means that you pay a lump sum of money towards the mortgage, and your lender re-amortizes the remaining balance. This will result in a lower monthly payment for the remaining term of your loan.
A recast mortgage does not lower the mortgage term length or the interest rate. If you want to lower either of these, you may want to consider refinancing instead. Of course, refinancing incurs a higher cost unless a no cost option is available with the lender.
Recast Mortgage Cost
While lenders do typically charge a fee for recasting, it’s usually a few hundred dollars at most. Occasionally, lenders do not charge a recast fee. However, keep in mind with a recast, lenders will generally require a minimum balance reduction of $5,000 or 10%. Amounts vary among lenders. So, be prepared for a fairly large sum requirement to do a recast.
Why Use a Recast Mortgage?
So now you may be wondering – when would a recast mortgage make sense? It doesn’t shorten the term, doesn’t lower the interest rate – what is it good for?
There are situations in which a recast can be a great tool for homeowners. For example, the profits from the sale of one home can be applied towards a new mortgage, freeing up monthly cash flow. It could also make sense to apply other “windfall” cash amounts to your mortgage and recast the balance. These include inheritance, divorce proceeds, large work bonuses, lottery winnings, liquidated retirement assets, tax refunds, etc.
Mortgage Recast: Same interest rate, same term remaining, lower balance = Lower mortgage payment
So if you already have a low interest rate, a large sum of money to put down, and want to save the costs of refinancing, a recast might be for you. In addition, a recast does not require the qualification process of a refinance, so it is much easier. Technically, a borrower could be unemployed with a 500 credit score and still complete a mortgage recast. Conversely, a mortgage refinance would require qualification.
Relocation Buyers Benefit from Recast Mortgage
One of the most popular uses for recasting a mortgage deals with selling a home after the purchase of another. Because of a job relocation or hot buyer’s market, a buyer may not be able to sell the current home prior to closing on a purchase. Therefore, funds from a sale are not available for down payment on the new purchase.
In this case, buyers are borrowing an amount higher than desired. So, the buyer’s monthly payment is higher because of an increased mortgage balance and possibly because of mortgage insurance. Mortgage insurance is added when buyers put down less than 20% of the purchase price.
But, with a recast mortgage it is possible to buy the new house with a lower down payment. Next, sell the other home and receive the proceeds from the sale. Then, contact your mortgage company to compare a mortgage recast vs refinance. It is key to compare costs, interest rate, and payment. The biggest benefit is that the sales proceeds may be used to pay the new mortgage balance down to the desired level. The term and rate are the same, but since the balance has decreased, the mortgage payment also decreases. The final resulting solution helps buyers complete the bridge between buying a home first and then selling the prior home.
Keep in mind that even first time home buyers may eventually have additional funds available for a recast mortgage.
How Does a Recast Mortgage Work?
If you’d like to explore the potential monthly savings a mortgage recast, there are mortgage recast calculators online that can help you. Just input a few pieces of information and see how much you could save each month. Also, it is important to remember that not all lenders offer the benefit of a recast. Be sure to contact your mortgage company first to see if they do, and if so, what the associated cost is.
Ask Early About Recasting Option
Whether using a bank, mortgage lender, credit union, or mortgage broker, it is possible to know recasting availability up-front. Even though banks, lenders, and even credit unions may transfer servicing to another lender, it may be possible to learn of the end investor’s requirements. In the case of mortgage brokers, the end investor is always someone else.
So, if the ability to recast is important to you, ask your lender or broker to assign your loan to a recasting friendly lender. Do not wait until closing to ask! Especially, if you will have immediate funds from a sale. Lenders can choose to lock specifically with a recasting lending. Who would want to pay for a refinance creating potentially double closing costs and even a higher interest rate? Thus, buyers should demand recasting in this case. Even get it in writing!
Lastly, remember to consult your financial adviser before making any drastic money moves, to make sure it’s the right fit for your overall financial portfolio and goals. Paying a large sum towards a debt with a very low interest rate may not be the best financial move. Other uses for these funds include paying off credit card debt, higher interest rate loans, funding college or retirement, and establishing an emergency fund.