Recasting a Mortgage
If you currently have a mortgage you may be wondering how you can lower your monthly payments without refinancing. Recasting your mortgage is one way to accomplish this.
What is mortgage recasting?
Recasting is when a borrower pays a large lump-sum payment towards their principal and the remaining monthly payments are then adjusted to reflect a new amortization schedule. The lower loan amount means you will also pay less in interest over the life of the loan. All the terms of the mortgage will remain unchanged.
How is recasting different from refinancing?
Refinancing is essentially replacing one loan with another one. Your new lender will pay off the balance to your old lender and then you begin making payments with the new lender. This means there are new loan terms including a new interest rate. Refinancing can lower your monthly payments if you refinance for a lower interest rate and because the length of the loan essentially starts over (you pay a 30 year mortgage for a few years and then refinance to another 30 year mortgage with the lower balance). Recasting will not change your pay-off date or your interest rate.
What are the pros of recasting a mortgage?
Recasting is often less expensive than refinancing since you are not paying for closing costs or an appraisal. Recasting is usually easier to qualify for than refinancing as well; your lender might not require proof of income or your credit scores. Additionally, while your interest rate will remain the same, you will still end up paying less in interest as the principal balance is lowered after you make the lump-sum payment. With a refinance, if you replace a 30 year mortgage you’ve paid on for several years with another 30 year mortgage, you may end up paying more in interest as mortgage payments start interest-heavy in the early years.
What are the cons of recasting a mortgage?
For starters, you might not even be able to recast a mortgage; not all lenders allow a recast and certain loans (like FHA or VA loans) do not qualify for recasting. If you have a high interest rate with your current loan, you will not be lowering your rate because the loan terms are not changed. You will not be shortening the length of the loan whereas a refinance could shorten your loan term if you move from a 30 year mortgage to a 20 or 15 year term. It’s also worth noting that recasting requires you to make a large, lump-sum payment (typically at least $5,000.00), thereby tying up your cash in equity. Keep in mind that while less expensive than refinancing, there is still a fee to recast a mortgage as well.
Recasting a mortgage can be an attractive option for someone looking to lower their monthly payments without the hassle of refinancing (as well as spending less than what would be required to refinance). A quick discussion with your lender can help you decide if a mortgage recast might be the right move for you.