Published in: Mortgages | July 27, 2020
By: Dana George
If you are a homeowner looking for a way to trim your monthly budget and you've got a lump sum you can use, mortgage loan recasting might be a good option.
If you find yourself with a chunk of money, a mortgage recast allows you to pay down your mortgage principal and save money by reducing your monthly payments on the remaining balance.
The easiest way to think of a mortgage recast is as a "do-over." You pay the same interest rate and recalculate the loan using the same repayment terms. All that changes is the amount financed and your monthly payment. Because you owe less money, you also end up paying less interest over the life of the loan.
If you instead put that same money towards the loan principal, you would lower the amount you owe but -- unlike recasting -- the monthly payment would remain the same.
Although it can take 45 to 60 days for a mortgage lender to complete a recast, it is relatively straightforward. Conveniently, as long as your loan is in good standing, the lender will not require a credit check, home appraisal, or income verification.
9 in 10 Americans can qualify to refinance their mortgage. With mortgage rates plummeting to multi-decade lows, there's no better time to cut your monthly mortgage payment.
Mortgage recasting is only available on conventional loans, and is not an option for FHA, VA, or USDA loans. Jumbo loans are also usually ineligible. Most -- although not all -- lenders offer mortgage recasting. Call your lender to learn whether it is a service they offer.
The amount of money you'll need to put towards recasting is typically at least $10,000, depending on the lender. What's important is that your original loan term and interest rate remain the same. For example, if you have a 30-year mortgage at a 3.7% interest rate and recast it after five years, the balance will be re-amortized over the remaining 25 years using the same rate.
Once you apply for a mortgage recast, your lender will likely require you to make two consecutive payments (at your original payment amount) before it recasts the loan. That said, you should keep making your regular payments until you hear from your lender.
You can recast your loan as many times as you would like but should remember to plan for recasting fees in the vicinity of $250 to $300.
In addition to lowering your monthly mortgage payment, here are some reasons you may want to explore mortgage recasting.
You can also build yourself an emergency cushion by recasting your mortgage and continuing to make your original payments. It will reduce your principal even further and if you run into financial difficulty, you can switch to the lower payments until you are back on a solid footing.
While there are specific circumstances under which it makes financial sense to recast a mortgage, recasting is not without its drawbacks.
If your goal is to use a lump sum of money in the wisest possible way, mortgage recasting is only one option. Here are others worth consideration:
Mortgage recasting may not be a term you are familiar with, but it should be. It's good to have as many tools in your financial arsenal as possible. And recasting may be a good way to reduce your overall mortgage costs and your monthly payments.
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