If you are a homeowner looking for a way to trim your monthly mortgage payment and you've got a lump sum you can use, mortgage loan recasting might be a good option.
In the event you find yourself with a chunk of money, mortgage loan recasting allows you to pay down your mortgage principal and save money by reducing the monthly payment on the remaining balance.
A simple way to view a mortgage loan recasting is to think of it as a do-over. You pay the same mortgage interest rate you had before and recalculate the loan using the same repayment terms. The only thing that changes is the amount financed and your monthly payment. Because you owe less money after making a lump-sum payment, you also end up paying less interest over the life of the loan. The ability to pay less interest may be the most attractive feature of a loan recast.
If you instead put that same money toward the loan principal each month, you would still 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 a relatively straightforward process. Conveniently, as long as your mortgage loan is in good standing, the lender will not require a credit check, home appraisal, or income verification.
Mortgage loan recasting is only available on conventional loans, and is not an option for FHA, VA, or USDA loans. Jumbo loans are usually ineligible. Most -- although not all -- lenders offer mortgage loan recasting. After all, making a mortgage recast easy for existing customers is one way to prevent them from refinancing the mortgage with another lender. The only way to find out for sure whether your lender offers mortgage recasting is to give the company a call.
The amount of money you'll need to put toward 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 loan 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 loan recasting.
You can also build yourself an emergency cushion by recasting your mortgage and continuing to make your original payments. Doing so will reduce your principal balance 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 loan recasting is only one option. Here are others worth consideration:
Mortgage loan recasting may not be a process 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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