To recast a mortgage means a homeowner substantially reduces their mortgage principal balance to lower their monthly payment without refinancing. A mortgage recast is done after closing on a home, can typically be done only once, should cost less than $500, and often requires the principal reduction to be $10,000 or more.
To recast a mortgage you need to call your mortgage servicer, instruct them that you want to do a mortgage recast, and pay them a principal reduction. The best part is that paperworks isn’t involved to recast a mortgage.
Recast a Mortgage
To recast a mortgage means that an existing monthly payment is lowered by re-amortizing the remaining mortgage balance after a significant amount of money is applied towards the principal. This is different than doing a rate and term refinance to lower the payment.
Here’s what you typically need to recast a mortgage:
- A principal reduction of $10,000 or more
- The one-time cost should be approximately $500
- There’s no paperwork involved
- Often a recast is only permitted once during the loan’s life
- Loan must be current with a 12 month on-time payment history
Most mortgage companies will require a minimum of $10,000 being put down towards the mortgage. That said, there are exceptions to this. We know of a (very) few investors that require a 10% payment towards the principal. A few others only require a $5,000 principal reduction to recast a mortgage. Check with your mortgage servicer for details.
The costs to recast a mortgage should be less than $500. Many servicers only charge $200 to $300. This is a one-time fee that is paid at the of the mortgage recast.
A mortgage recast does not require any underwriting or mortgage documentation like the mortgage loan process. Can we get a Hallelujah!
Home loan recasts are typically only allowed once during a mortgage’s lifetime so plan accordingly. It could be prudent to wait for any future windfall of cash before doing recast to get the most bang for your buck.
A mortgage recast will will require an on-time payment history and the loan being current. Every company will operate differently and it’s at their discretion as to whether they’ll allow the recast.
Pros & Cons
“Should I Recast My Mortgage?” That’s the question.
The advantage of a recast is that the monthly payment is reduced for little effort and minimal costs. If that’s a high priority then a mortgage recast makes sense.
The disadvantage of the recast compared to a “normal” principal reduction is that the principal reduction significantly reduces the interest paid over the life of the loan. If paying less interest and reducing the term is a priority then don’t recast a mortgage and do the principal reduction.
When to Recast a Mortgage
There are a number of examples when it may be prudent to recast a mortgage. Here are a few of the most common examples:
- Selling a Home: when someone buys a home before selling their existing home. Once the previous home sells the net proceeds from the sale – which can be determine from our seller’s net sheet calculator – can be applied to the new mortgage for a recast.
- Retiring: Perhaps someone is retiring and is preparing to live off a fixed income. A primo scenario is if they receive a lump sum retirement payout through a golden parachute. They can use those proceeds to reduce the mortgage payment obligation via the recast.
- Excess Cash: like Tommy in out example above, someone may have an abundance of liquid cash and would prefer a lower monthly obligation.
Check for Prepayment Penalties
Prepayment penalties in today’s post-mortgage-meltdown world are rare. They primarily exist with second lien mortgages and small banks.
Prepayment payments are fees assessed by a mortgage holder for being paid off too quickly. These mortgage companies want to ensure they’re making money for issuing a loan. Some prepayment penalties can be issued even for a partial payment (i.e. a principal reduction). Be sure to check with your mortgage servicer before paying down the mortgage.