What is recasting?
It’s actually really simple, but it’s not advertised very often, so most people have never even heard of it. Recasting your mortgage is simply making a large payment toward your principal balance, paying a one time processing fee and then having your mortgage payment adjusted (re-amortized) over the remaining term based on the new principal balance. Depending on the amount of the new loan and how many years the new payment is based on, the payment could be much lower.
With a traditional mortgage, making a large lump sum payment at any time will only lower your principal balance and shorten the time it takes to pay off the mortgage, which will save you interest over time, but your payment will still remain the same as long as you are still paying off your mortgage. When you recast your mortgage, the mortgage rate and mortgage type remain the same, but your principal and interest payment is adjusted and calculated on the new loan balance and for only the remaining term left on your original mortgage. So, if you recast your thirty year mortgage after 5 years, the new mortgage payment would be based on the remaining 25 years.
On the other hand, Refinancing offers a range of options to choose from, so for those looking to take cash out, shorten the term of the mortgage, get a lower rate or change mortgage programs, a refinance would be the only option.
Common reasons why/when someone would recast their mortgage:
- purchase a home before selling current home – once the current home is sold, use the sales proceeds to recast the new mortgage for a lower payment
- receive a large year end bonus or commission and wish to lower the mortgage payment with a recast
- receive a large settlement pay out and wish to lower the mortgage payment with a recast
- receive an inheritance and wish to lower the mortgage payment with a recast
Original purchase loan balance: $310,000 Current loan balance after 5 of 30 years: $273,000 Current P&I payment at 4% – $1479 /mo
Pay $50,000 towards the loan balance to recast the mortgage
New loan balance: $223,000 New P&I payment at 4% for remaining 25 years – $1177 /mo
Every lender has different rules and minimum requirements for recasting a mortgage, but for the most part, the overall cost to recast the mortgage runs from $250-$500 which is paid when the lump sum payment is made. There is also usually a minimum seasoning period on the mortgage before a recast would be allowed and there is also usually a minimum lump sum payment of $5,000 with many banks.
Recasting is typically only available on Conventional mortgages backed by Fannie Mae of Freddie Mac and many times your lender may only allow one recast on the mortgage.
If you are planning to buy a new home with the idea that you will recast the mortgage at some point, be sure to check with your lender to make sure that recasting will be an available option.
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