Mortgage Recast

Mortgage Recast:Definition, How It Saves You Cash 2022

Mortgage Recast

Mortgage Recast

Mortgage Recast:If you have extra money that you’d like to put toward paying off your house, doing so through what’s called a recast can help you save money each month without having to go through the hassle of refinancing.
But there are limits on your ability to recast your mortgage, and those with certain loan types or little equity might not have the option.
A mortgage recast happens when a borrower makes one large, lump sum payment toward their remaining mortgage balance and the lender reamortizes the loan, calculating a new monthly payment based on the now-lower balance.
All mortgages follow an amortization schedule. Amortization is a complex-sounding word that just refers to the paying off of the mortgage over a set amount of time. For example, if you borrow $200,000 that needs to be repaid over 30 years with a 5% interest rate, you’ll need to pay $1,074 every month to pay back the principal in full with interest.
When you request a mortgage recast, you’ll use the funds you allocated for it to pay off a chunk of your mortgage principal. Your lender or servicer then recalculates how much you need to pay each month to fully pay off your balance by the end of your loan term.
Because you now owe less on your mortgage, a recast will result in a lower monthly payment.
This differs from prepaying your mortgage, which shortens the amount of time it will take you to pay off your loan but doesn’t lower your monthly payment. Some borrowers will make a few extra mortgage payments each year or prepay a lump sum without requesting a recast to pay down their mortgage faster.
If your primary goal is to save money on interest, you might want to consider prepaying rather than recasting.
“Our analysis is that if someone is merely looking to save on their ‘total life of loan interest’ payments, then prepaying the principal balance without recasting your mortgage will save you over the life of the loan,” says Shmuel Shayowitz, president and chief lending officer at Approved Funding.
Recasting will save you on interest as well, because you’re decreasing the amount of money you’ll pay interest on. But prepaying without a recast has the benefit of both reducing your balance and shortening your term.
If you want to recast your mortgage, you’ll need to find out if you have enough money to do so.
Shayowitz says that servicing companies typically want principal reduction amounts to be “substantial,” and may require borrowers to pay $25,000 or more toward their mortgage balance if they want to do a recast.
Some lenders or servicers may not have a minimum principal reduction requirement. And some allow as little as $5,000. You can reach out to your lender to find out if it offers recasts and what its requirements are. The lender may require that you have a certain amount of equity already in your home, and you’ll likely need to be current on your mortgage, with no history of late or missed payments.
Lenders typically charge a fee between $150 and $250 to recast, according to Shayowitz.
You’ll also need to make sure the mortgage you have allows recasts, because not all types of mortgages do. Government-backed mortgages, such as FHA, VA, and USDA loans, don’t allow recasts.
Whether a recast is right for you depends on your goals, budget to pay for the required amount and fees — and whether it’s even an option for you to do so.
Pros
Cons
Lower monthly payment
Not available with all loans and lenders
Simpler and cheaper than refinancing
May need a large sum to recast
Keep your current interest rate
Funds tied up in home could be used elsewhere
Save on interest over the life of the loan
Costs money
The biggest benefit of recasting your mortgage is that you’ll have a lower monthly payment, which can give you more wiggle room in your budget each month for other things. The only other way to lower your monthly payment is by refinancing, which takes time and costs money.
A recast is also beneficial if you’re generally happy with the terms of your mortgage, and don’t want to lose your current interest rate or reset your loan term.
While it can be financially advantageous to recast, not everybody has the ability to do so. Even if you have a loan and lender that allows recasting, you might have a hard time clearing your lender’s minimum principal reduction requirements.
If you do have a large chunk of money available, tying it up in your home’s equity might not be your best option. Consider whether that money could do more for you in your retirement savings or a brokerage account.
A mortgage recast can be really beneficial if your current monthly mortgage payments are putting a strain on your budget. But depending on your situation, you might be better served by other options, such as prepaying your mortgage or refinancing.
A mortgage refinance can help you achieve similar goals to a recast, but it requires a little more work on your end.
When you refinance, you replace your current mortgage with a new one. Borrowers can get a rate-and-term refinance to change the interest rate or term length of their current loan, or a cash-out refinance to take equity out of their home.
It costs money to refinance, and you’ll likely need to go through a credit check and get a new appraisal to get approved. But if you need to lower your monthly payment and you don’t have a large enough sum to qualify for a recast, refinancing may be your best option.
With refinancing, you can only lower your monthly payment if you get a lower interest rate or if you refinance into a longer loan term (for example, if you have 25 years left on your current mortgage and you refinance into a new 30-year term). Keep in mind that the longer it takes to pay off your mortgage, the more you’ll pay in interest in the long run.
Whether a recast or a refinance makes more sense for you depends on your goals, your finances, and the economy. When rates are low, a refinance could be the best option. But if you want to keep your current rate and lower your monthly payments, a recast is likely the better choice – provided you have the funds to put toward it.
The easiest way to determine what your new monthly payment would be after recasting your mortgage is to use an online amortization calculator or reach out to your lender.
If you use an amortization calculator, you’ll need to know the following:
You’ll input this information and the calculator will tell you what your new monthly payment will be and how much you’ll pay in interest over the life of the loan. Compare this number to what you currently pay each month to decide if recasting is worth it to you.

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