Do you want to reduce your mortgage without refinancing? This is a common goal – after all, a lower mortgage means lower monthly repayments. If you don’t want to refinance the traditional way, you might recast your home loan instead.
Here’s how to recast a mortgage and when it might be a good idea.
Recast a Mortgage Example
What is a mortgage recast? Well, a mortgage recast means paying a lump sum towards your home loan.
This lump sum is in addition to your regular monthly payments – you still need to pay these on time. What you’re doing, though, is bringing down the principal loan balance.
How Mortgage Recasts Work
A mortgage recast is straightforward. All you need to do is contact your lender and tell them you want to recast the home loan. If the lender accepts your request, you pay a lump sum.
When you recast your mortgage and pay the lump sum, the lender recalculates the principal loan balance. There are two possible outcomes:
- Your lender changes your loan repayments. You will pay less each month since there’s less outstanding.
- The monthly payments remain the same but your lender shortens the loan. For example, you might pay off your mortgage in 20 years now, rather than 25.
Typical Requirements for a Mortgage Recast
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
- Loan must be current with a 12 month on-time payment history
Most mortgage companies will require a minimum payment of $10,000.
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 upon completion.
A mortgage recast does not require any underwriting or mortgage documentation like the mortgage loan process. Can we get a Hallelujah!
How Many Times Can I Recast a Mortgage?
Home loan recasts are typically only allowed once during a mortgage’s lifetime so plan accordingly. To get the most benefit from a mortgage recast, consider waiting until you have a cash windfall. This will allow you to pay a larger lump sum – and reduce your mortgage sooner.
What if My Lender Won’t Agree to a Mortgage Recast?
Your lender may have criteria you need to meet before you can recast a mortgage. For example, most mortgage recasts require:
- The loan being current; and
- Making payments on time.
If your mortgage payments aren’t up to date, you may be unable to recast your mortgage.
Recast a Mortgage Example
Any type of mortgage refinance can be confusing. The best way to illustrate how recasts work is through an example.
Tommy Buys a Home
Let’s suppose it’s March and our best pal, Tommy, closes on a 30 year fixed-rate mortgage for $400,000. We’ll assume he has a 6% interest rate with a principal and interest payment of $2,398 per month.
Now let’s assume exactly one year later Tommy wins $50,000 with a lotto scratch-off ticket. Tommy wants to put this newfound fortune towards his mortgage. At this point, Tommy owes approximately $395,000 on his home loan after one year of making on-time mortgage payments. Tommy can either do a “normal” principal reduction or he can recast a mortgage.
“Normal” Principal Reduction
A normal principal reduction is simple. Tommy can write a check for $50k and apply it towards his principal and lower his loan balance from $395,000 to $345,000. This will reduce his loan term to 22.3 instead of the original 30 years since he’ll continue to pay his regular monthly payment of $2,398.
This principal reduction will lessen the total mortgage interest paid on the loan from $463,350 (ish) to $290,850 (ish). That’s a reduction of $172,500 in paid interest. Not a bad way to spend $50,000 Tommy!
Recast a Mortgage
Tommy’s second option is a mortgage recast. Tommy can call the mortgage servicer and tell them he wants to do a recast and not a normal principal reduction.
They explain that it’s a $350 fee and provide details on how to send the payment. Tommy does what they say.
First the mortgage servicer applies the $50k to principal for a new $345,000 balance. Secondly, they amortize the loan with the existing 6% rate over the remaining 29 years of the loan. (Remember Tommy is doing this exactly one year after closing on a 30 year note; hence the 29 years.)
Tommy now has a payment of $2,094 per month. That’s $304 lower per month than the original $2,398. The contrast of this recast from the “normal” principal reduction is that the loan will still last the full 30 years.
The amount of total interest paid will be around $407,600. The result is about $55,700 less interest paid than the “normal” 30 year loan without the $50k applied.
Is a Mortgage Recast a Good Idea?
Recasting a home loan has some advantages.
- There’s no need to qualify for a new home loan. You won’t go through a credit check.
- The mortgage recast may reduce your monthly mortgage payments or the loan term.
- If you have a low interest rate, you can keep it. You won’t need to change interest rates.
Drawbacks to Recasting a Mortgage
There are some possible drawbacks to mortgage recasts.
- The recast may not shorten the loan’s duration. You’re still committed to paying the loan for the same number of years.
- A recast might not change your monthly payments. Depending on your finances, this could make recasting less appealing.
- Not everyone feels comfortable investing so much in their home. You may find other uses for such a lump sum.
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 determined 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 our 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.
Are you looking for a new home loan? Our team can help. Contact us to discuss home loan options and mortgage refinancing.
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