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What Is Mortgage Recasting and How It Can Save You Money
If you are eager for a way to save money on your mortgage, one popular option is through mortgage recasting, or when a large payment allows you to re-amortize your mortgage and reduce your monthly payments. Here, we go through the pros and cons to recasting a mortgage.
What is mortgage recasting?
Mortgage recasting, also known as mortgage re-amortization, is when a borrower makes a lump sum payment toward their home loan balance. The lender re-amortizes the loan, and the borrower’s monthly payments are adjusted, though the interest rate and loan term stay the same.
Recasting saves borrowers money in two different ways. First, re-amortizing the loan based on the new principal balance reduces a borrower’s monthly payments. The homeowner will also save money on interest over the course of their loan since there’s a lower balance to accrue interest on.
Many lenders allow borrowers to recast their mortgages, including those purchased by Fannie Mae and Freddie Mac. However, government-backed loans such as FHA loans and VA loans aren’t eligible.
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How does mortgage recasting work?
Suppose a mortgage borrower had a current principal balance of $200,000 with a 30-year term and an interest rate of 3.5%. If they continue making their regular mortgage payments, they can expect monthly payments of about $898. By the time they pay off the full mortgage, they’ll have paid around $123,000 in interest.
But imagine instead that they spend $30,000 to recast their mortgage, bringing their new principal balance down to $170,000. Using the same 30-year term and 3.5% interest rate, their new monthly payments will be just $763 per month. And they’ll ultimately pay about $105,000 in interest, saving themselves about $18,000.
Pros of mortgage recasting
Mortgage recasting can be an excellent way to help homeowners save money on their home loans. Similar to mortgage refinancing, it can help borrowers pay less money in interest. There are a handful of benefits to recasting and a couple of reasons why homeowners might prefer it over refinancing.
- Lower monthly payments. Recasting your mortgage reduces your monthly payment because it takes a smaller principal balance and spreads it across the same loan term.
- Less interest paid overall. Because of the new lower principal balance, mortgage recasting results in paying less interest over the course of the loan.
- Fewer requirements than refinancing. Mortgage refinancing comes with many hoops to jump through, including an appraisal and qualifying for a new loan. Recasting is far simpler, and you don’t have to meet special financial requirements.
- Less expensive than refinancing. When you refinance your mortgage, you have to pay a whole new set of closing costs. Mortgage recasting only comes with a small fee.
Cons of mortgage recasting
Despite its perks, mortgage recasting isn’t right for everyone. In some cases, an alternative such as refinancing might be a better fit.
- Mortgage recasting fee. When you recast your mortgage, you’ll have to pay a small fee, often around $250. While this is significantly less than the amount you’d pay in closing costs to refinance a mortgage, it’s still something to consider.
- No reduced interest rate. When you refinance your mortgage, you often get the benefit of a lower mortgage interest rate, which can save you 10s or even hundreds of thousands over the life of the loan. Recasting doesn’t lower your interest rate — it only reduces the principal balance that accrues interest.
- No shortened loan term. Mortgage recasting doesn’t shorten your loan term. If you had 20 years left on your loan, you still have 20 years left after recasting. However, your new lower monthly payment leaves more money available in your budget, so it may be easier to pay your mortgage off early.
- Not available for all mortgages. Not everyone is eligible to recast their mortgage. Government-backed loans such as FHA loans and VA loans generally aren’t eligible. However, those mortgages are eligible for refinancing, so homeowners with those types of home loans may consider that instead.
Qualifying for mortgage recasting
Not everyone is eligible for a mortgage recasting. It’s best to talk to your lender about their requirements and find out whether you qualify. Here are some common requirements you’ll likely run into:
- No government-backed loans: Government-backed loans such as FHA loans and VA loans aren’t eligible for mortgage recasting.
- Recasting with your current lender: Not all lenders offer mortgage recasting. And unlike mortgage refinancing, you can’t simply recast with a different lender than the one that services your loan.
- Recasting minimum: Many lenders require borrowers to make a minimum recasting payment. Lenders typically require that your payment is at least $5,000.
- Equity and payment requirements: Some lenders may have requirements stating you must have a certain percentage of equity in your home or that you have made a certain number of on-time payments before recasting.
- Recasting fee: Most lenders charge a small fee to recast your mortgage. The fee is typically around $250, meaning it’s a drop in the bucket compared to the lump sum payment you’ll make. But it’s important to be aware of and budget for this fee.
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