A mortgage recast is a process that allows homeowners to change their mortgage terms without taking out a new loan. This can be a smart option if you want to lower your monthly payments or pay off your mortgage faster. By making a large payment toward the principal balance, you can reduce the amount you owe and potentially lower your interest payments.
In this guide, we will explore what mortgage recasting is, how it works, and when it might be a good choice for you.
Understanding Mortgage Recast
Mortgage recasting allows homeowners to reduce their monthly mortgage payments without altering the loan term or interest rate. It involves making a substantial lump sum payment toward the principal balance of the mortgage, after which the lender recalculates your monthly payments based on the new, lower balance.
In essence, you’re not refinancing your mortgage but restructuring it to reflect the reduction in your loan balance. This makes your monthly payments smaller while keeping your interest rate and the original loan term intact. Mortgage recasting can be a good option if you have a windfall of cash and want to reduce your monthly payments without going through the hassle of refinancing.
Key Features:
- Maintains current interest rate
- Reduces monthly payments
- Requires minimal paperwork
- Low processing fee ($250-$500)
- No credit check needed
What Is Involved in a Mortgage Recast?
A mortgage recast involves three key steps:
- Making a substantial lump sum payment toward the principal balance of your mortgage.
- Recalculating your monthly payments based on the new principal balance, reducing the amount you owe each month.
- Maintaining your original loan terms such as the interest rate and the loan term length, meaning you won’t have to re-apply for a new loan.
Ideal Scenarios for Recasting Your Mortgage
There are several scenarios where mortgage recasting might be the right choice. Here are some common situations in which homeowners should consider recasting their mortgage:
1. You’ve Received a Financial Windfall
If you come into a large sum of money, whether from an inheritance, a bonus at work, the sale of a property, investment returns, or a legal settlement, you might consider using part of that money to recast your mortgage. This allows you to lower your monthly payments while maintaining your current mortgage terms.
Examples of financial windfalls that could trigger a recast include:
- Inheritance – A family member leaves you a significant sum.
- Bonus from work – A large annual bonus could help reduce your mortgage balance.
- Sale of another property – The sale of a rental or investment property could provide the necessary funds.
- Investment returns – A successful investment can generate extra funds to reduce your loan balance.
- Legal settlement – Money from a lawsuit or legal dispute could be used to pay down your mortgage.
2. You’re in a Bridge Loan Situation
A bridge loan is a short-term loan used to bridge the gap between the sale of one property and the purchase of another. If you’ve bought a new home before selling your current one and plan to apply the proceeds from your old home’s sale to reduce your mortgage balance, a mortgage recast can help you lower your monthly payments.
This is especially helpful if you want to reduce your financial burden after selling your old home, as the recast will allow you to re-adjust your payments based on the new loan balance.
3. You’ve Had Success with Investment Properties
If you’ve generated significant rental income or sold other investment properties, you may have extra cash available to recast your mortgage. For example, receiving a partnership buyout or a large rental income payment can provide the funds necessary to reduce your loan balance, leading to more manageable monthly payments.
Financial Requirements for Mortgage Recasting
Before you move forward with a mortgage recast, it’s important to understand the typical financial requirements:
- Lump Sum Payment: Most lenders require a minimum lump sum payment, usually between $5,000 and $10,000, to recast your mortgage.
- Mortgage Payments: You must be current on your mortgage payments before you can request a recast. If you are behind on payments, the lender will likely deny your request.
- Loan Type: Conventional loans typically qualify for recasting. Government-backed loans like FHA or VA loans may not be eligible, so you should check with your lender to confirm.
- Processing Fees: There are usually fees involved in recasting your mortgage. These can range from $250 to $500, depending on your lender.
Your Financial Checklist:
Before proceeding with a mortgage recast, ensure that:
- Your emergency fund remains intact after making the lump sum payment.
- You have no high-interest debt that requires attention.
- You will see a clear financial benefit from the reduction in monthly payments.
- You have long-term plans to stay in the home for the foreseeable future.
Benefits and Limitations of a Mortgage Recast
Benefits:
Mortgage recasting can offer several advantages:
- Lower Monthly Payments: By reducing the principal balance, your monthly mortgage payments will be recalculated, resulting in lower payments.
- No Credit Check: Since a mortgage recast doesn’t involve a new loan, no credit check is required.
- Minimal Fees: The fees associated with recasting are typically lower than refinancing, making it a more cost-effective option.
- Keep Existing Loan Terms: You maintain your current interest rate and loan term, which could be beneficial if you have a favorable rate.
- Simple Process: The process of recasting is straightforward compared to refinancing, and it can typically be done more quickly.
Limitations:
While mortgage recasting can be a useful tool, there are some limitations:
- Requires Substantial Cash: You need to have a significant lump sum of money available to recast your mortgage, which may not always be feasible.
- Not Available on All Loans: Not every type of mortgage qualifies for a recast. For example, government-backed loans often do not.
- Interest Rate Stays the Same: The interest rate on your mortgage remains unchanged, so if rates have dropped since you took out your loan, you won’t benefit from a lower rate.
- Limited Lender Availability: Not all lenders offer mortgage recasting, so it’s important to check with your lender in advance.
Real-World Examples of Mortgage Recasting
Example 1: The Inheritance Scenario
You have a loan of $300,000 at a 4% interest rate, with monthly payments of $1,432. After receiving an inheritance of $50,000, you used it to reduce your loan balance to $250,000. Now, with the same interest rate, your new monthly payment is $1,193, saving you $239 each month, but there was a processing fee of $300 for this change.
Example 2: The Property Sale Scenario
You started with a loan of $500,000 at a 3.5% interest rate, making monthly payments of $2,245. After selling your home, you received $200,000 and used it to reduce your loan balance to $300,000. With the same interest rate, your new monthly payment is now $1,347, saving you $898 each month, but there was a processing fee of $500 for this adjustment.
Steps to Recast Your Mortgage
If you decide that mortgage recasting is right for you, here are the steps to take:
- Contact Your Lender: Verify that recasting is available for your mortgage type and understand the minimum requirements.
- Gather Documentation: Prepare documentation such as proof of funds, your current mortgage statements, and income verification (if required).
- Submit Your Application: Complete the necessary forms, pay the processing fee, and provide the lump sum payment.
- Review New Terms: Confirm your new monthly payment and ensure that all changes are reflected correct
Pro Tips for Mortgage Recasting
- Keep documentation of all communications with your lender.
- Consider timing your recast with your annual financial review.
- If possible, continue making higher payments to pay off the loan faster.
- Consult with a tax advisor about the potential impact on your taxes.
Bottom Line
Mortgage recasting can be a valuable tool for managing monthly expenses, provided that homeowners meet the necessary criteria and have sufficient funds available. It’s essential to weigh the benefits against potential limitations to determine if this option aligns with one’s long-term financial goals.
