The housing and mortgage market remains relatively volatile since 2020, where home prices consistently change and the Federal Reserve raises interest rates to combat inflation. With many Americans finding themselves priced out of participating in the housing market, those with mortgages are also finding ways to cut costs to afford other costs of homeownership. Many homeowners look for ways to lower their monthly mortgage payments without enduring an expensive refinancing process that might end up leaving them with a higher interest rate.
Mortgage recasting provides homeowners with the opportunity to lower their monthly payment via a lump sum payment, without requiring the hassles that come with refinancing. In the right situations, mortgage recasting can benefit borrowers with a bit of extra cash. This article highlights the important things to know about mortgage recasting, including what it is and whether it makes sense for your financial situation.
What is Mortgage Recasting?
Mortgage recasting involves making a lump sum payment to your mortgage lender in order to decrease your future monthly payments. To initiate a mortgage recast, you will need to have surplus cash that you are willing to contribute to the principal of the mortgage. Once you have made this lumpsum payment, your lender will then amortize your loan (basically, reallocate outstanding costs) over its remaining life. Depending on how large your lumpsum payment was, you can significantly reduce your future monthly payments.
By paying down the principal quickly, you can also decrease some of your future interest expenses and potentially set yourself up to pay off your loan early. However, once you have initiated the mortgage recast, you will not be able to take it back and regain access to the lumpsum payment. Homeowners should therefore carefully consider whether this option is appealing enough for them to commit to for the remainder of their mortgage term.
How Does Mortgage Recasting Work?
A borrower can always call for a mortgage recast, the lender will never require one. If the borrower has surplus cash that they want to allocate towards their home, they will then need to contact their lender and let them know they are interested in mortgage recasting.
A mortgage recast will typically come with a minimum required payment, which is usually around $5,000. All of this payment goes toward the principal of the outstanding mortgage, meaning it will directly decrease the principal balance that is due to the lender.
After the borrower completes their first payment, themselves and the lender will establish a future mortgage schedule, meaning that all future payment requirements will change. In most cases, lenders will offer their borrowers a clear amortization chart that illustrates how much they will be expected to pay towards principal and interest each month, as well as how much they can potentially save over time.
Due to the compounding effects of interest, initiating a mortgage recast closer to the beginning of the mortgage will have a larger financial effect. It is also important to note that initiating a mortgage recast will usually carry a fee from the lender, though this fee is relatively small and certainly much lower than the total cost of refinancing.
Keep in mind, the only thing that mortgage recasting changes is the monthly payment. Both the interest rate and the mortgage term remain the same. However, because your monthly payments, and total payments, will decrease, you might eventually find yourself in a position where you can pay off your mortgage early.
Who Qualifies for a Mortgage Recast?
Not every homeowner may qualify for a mortgage recast. To qualify, borrowers cannot have a government-backed loan, such as those supported by the FHA, VA, USDA, and other agencies.
Furthermore, you will also need to meet your lender’s basic requirements. Usually, this includes making a minimum number of consecutive payments on time, making a minimum payment, and having a minimum equity share of your home. If you are unsure whether you can qualify, you should speak directly to your lender.
How is a Mortgage Recast Different from Refinancing?
Mortgage recasting and refinancing offer borrowers the opportunity to decrease their monthly payment. However, it is important to note the differences between these two processes. When you refinance, you essentially apply for a new mortgage, meaning that any terms, including monthly payments, interest rates, and the length of the mortgage, can potentially change.
With mortgage recasting, on the other hand, you will still keep your current mortgage and your current lender. The only thing that changes is the amount you pay monthly. This process is significantly less expensive than refinancing, which is why, when available, it can be an appealing option.
Advantages of a Mortgage Recast
The most obvious reason to recast a mortgage is that it lowers your exposure to interest. Mortgage recasting also offers the additional following benefits:
- Depending on how much you recast and when you choose to recast during your mortgage, you could save tens of thousands, or even hundreds of thousands, of dollars over time.
- Mortgage recasting will lower your minimum monthly payment, which might make it easier to manage your personal finances or pursue other important financial goals.
- Mortgage recasting is fairly easy, there won’t be any credit checks, and is much less expensive than refinancing.
- You’ll be able to keep your current interest rate, which might be very desirable depending on what rates were when you secured your mortgage versus where they stand at the time of recasting.
Disadvantages of a Mortgage Recast
As you’d probably expect, mortgage recasting also has its fair share of drawbacks, including the following:
- If you are considering a mortgage recast, that means that you have a considerable amount of surplus cash available. While a mortgage recast could reduce the amount you pay on your mortgage, you might be able to make even more money by investing that money elsewhere.
- Not all lenders offer mortgage recasting, meaning it simply might not be an option.
- There will usually be a modest fee, usually $500 or less.
Is a Mortgage Recast Right for You?
Whether a mortgage recast is right for you will depend on your personal financial situation. If you’re entertaining the idea of a mortgage recast, make note of the money you have to put toward your initial payment and consult with your lender to set up a schedule that works with your finances. While mortgage recasting can decrease the amount you pay monthly, borrowers must carefully weigh their options and take decisions about their mortgage seriously.