Recast a MortgageTo 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.
Recast a Mortgage Example
The best way to illustrate a recast 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
The other option Tommy can do is recast the mortgage. 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.
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.
Loan Officer, NMLS # 729612