High mortgage payments can derail your monthly budget making it impossible to enjoy the little joys of life. If you have extra cash in hand, put it towards your principal amount. The mortgage lender will recalculate the mortgage amount and lower your monthly payment.
Keep in mind, recasting the mortgage will not lower the interest rate or repayment term.
What does Recast Mortgage mean?
A Recast mortgage is a strategy where the loan borrower pays a lumpsum amount towards their mortgage principal. This lowers the monthly mortgage amount. It is a good option if you do not have a cash flow issue. You become debt-free sooner than later!
However, some government loans like the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) do not allow recasting mortgages.
Recast Mortgage Calculator
Say, you have a 30-year mortgage tenure for $200,000 and a 4.99% interest rate. Your monthly mortgage payment will be around $1,072.43.
If you decide to pay a lump sum of $40,000, your new loan amount to $160,000.
Once the mortgage is recast your monthly payment will come down to $840!
Consider a mortgage recast if you have unexpected cash in your hands. Say, you got a huge bonus at work, use some of it to recast your mortgage!
How Does Recasting A Mortgage Work?
Listed below are steps for recasting a mortgage. Although there might be some additional tasks that may differ from lender to lender.
Step 1: The homeowner makes a payment: As the homeowner, you first pay the lender’s pre-decided minimum amount. This amount is deposited in your loan account against the principal loan value.
Step 2: The lender reamortizes your balance: Mortgage amortization refers to the process of paying off a mortgage loan through a series of regular payments over a fixed period of time. After payment, the lender will modify the repayment plan to reflect your new monthly commitments.
Step 3: The lender charges servicing fees: Lenders will charge a flat service fee for the recasting process. The service fee varies from lender to lender.
How To Qualify For Mortgage Recasting
There are certain requirements you must fulfill, in order to qualify for mortgage recasting. We have listed them below.
No government backup loan
Not all mortgages are eligible for recasting. Loans like the United States Department of Agriculture (USDA) or the Department of Veterans Affairs (VA) cannot be recast.
Minimum Principal Reduction
Every lender has minimum outstanding criteria for recasting. So, you need to speak to your lender before deciding on the recasting process.
Minimum Equity requirement
Lenders may set a recast limit, say $20,000. Only once you are ready with $20,000, pay it against your principal amount.
Payment records
To be eligible for recasting, you must make your mortgage payments on time and have a solid payment history. You might not be eligible for this option if you have past-due accounts or late payments.
Keep in mind that not all lenders provide the option of mortgage recasting.
Recast Mortgage FAQs
1. Should I recast my mortgage?
Recasting a mortgage needs a steady cash flow. If you have earned some bonus money then you may think of recasting the mortgage. It will help you in reducing your current loan principal amount.
2. How many times can you recast a mortgage?
Every lender will have its own recasting policy. Some lenders might agree to a recast twice a year or against some suitable lump sum amount. You will have to check with your lender to know more.
3. Is it better to recast or pay down the principal?
Recasting would be a better choice if you want to increase your cash flow and decrease your monthly payments. Whereas, paying down the principal would reduce the interest costs and pay off your mortgage faster.
4. Does recasting a mortgage change the interest rate?
No, in the recasting interest rate and other terms remain the same. Here you adjust the loan amortization schedule by reducing the principal balance, resulting in lower monthly payments.
5. What is the difference between recast and refinance?
A mortgage recast involves the original mortgage. You pay a lump sum to reduce your principal amount. On the other hand, refinancing a mortgage means completely paying off the original mortgage and applying for a new one.
The Bottom Line
Recasting a mortgage is a great choice if you want to lower your monthly payments. Ask your lender the terms of recasting your mortgage, before making a final decision.
Keep in mind, your interest rate and mortgage repayment term will not change even if you opt to recast your mortgage.
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