What Is Mortgage Loan Recasting?

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If you are a homeowner looking for a way to trim your monthly budget and you've got a lump sum you can use, mortgage loan recasting might be a good option.  

How a mortgage recast works

If you find yourself with a chunk of money, a mortgage recast allows you to pay down your mortgage principal and save money by reducing your monthly payments on the remaining balance. 

The easiest way to think of a mortgage recast is as a "do-over." You pay the same interest rate and recalculate the loan using the same repayment terms. All that changes is the amount financed and your monthly payment. Because you owe less money, you also end up paying less interest over the life of the loan. 

If you instead put that same money towards the loan principal, you would lower the amount you owe but -- unlike recasting --  the monthly payment would remain the same.

Mortgage recast details

Although it can take 45 to 60 days for a mortgage lender to complete a recast, it is relatively straightforward. Conveniently, as long as your loan is in good standing, the lender will not require a credit check, home appraisal, or income verification. 

Mortgage recasting is only available on conventional loans, and is not an option for FHA, VA, or USDA loans. Jumbo loans are also usually ineligible. Most -- although not all -- lenders offer mortgage recasting. Call your lender to learn whether it is a service they offer. 

The amount of money you'll need to put towards recasting is typically at least $10,000, depending on the lender. What's important is that your original loan term and interest rate remain the same. For example, if you have a 30-year mortgage at a 3.7% interest rate and recast it after five years, the balance will be re-amortized over the remaining 25 years using the same rate. 

Once you apply for a mortgage recast, your lender will likely require you to make two consecutive payments (at your original payment amount) before it recasts the loan. That said, you should keep making your regular payments until you hear from your lender. 

You can recast your loan as many times as you would like but should remember to plan for recasting fees in the vicinity of $250 to $300. 

Pros of mortgage recasting

In addition to lowering your monthly mortgage payment, here are some reasons you may want to explore mortgage recasting.

  • If the interest rate has risen since you took out your original mortgage, you'll be able to hold onto that lower rate. 
  • You will pay less in interest overall due to a smaller principal amount. 
  • You can lower your monthly mortgage payment without extending the length of the loan. 

You can also build yourself an emergency cushion by recasting your mortgage and continuing to make your original payments. It will reduce your principal even further and if you run into financial difficulty, you can switch to the lower payments until you are back on a solid footing. 

Cons of mortgage recasting

While there are specific circumstances under which it makes financial sense to recast a mortgage, recasting is not without its drawbacks.

  • If your current mortgage rate is high, it does not make financial sense to recast at the same rate. Look into refinancing to see if you can benefit from the lower rates.
  • It is possible to become house rich and cash poor by putting all your funds into home equity, leaving little cash for other important goals. 
  • If you carry high-interest debt, putting a lump sum towards your mortgage could be an expensive mistake. The smart move is to eliminate high-interest debt first. 

Alternatives to mortgage recasting

If your goal is to use a lump sum of money in the wisest possible way, mortgage recasting is only one option. Here are others worth consideration:

  • Pay a little extra toward your mortgage principal each month. It won't lower your monthly obligations immediately but will help you retire the debt earlier. 
  • Refinance your mortgage by taking out a new loan to pay off the old. Refinancing may be your best option if the current interest rate is lower than your original rate. While mortgage recasting simply recalculates your payment based on the new, lower principal amount, refinancing is a lot like taking out a new mortgage. You may be required to pay application, credit, origination, flood certification, title search, and recording fees. You will also be required to have a new home appraisal, and possibly, another home inspection. 
  • Use the money to make investments on the stock market that could provide a higher rate of return in the long run.
  • Build an emergency fund with enough money to pay three to six months' worth of bills. That way you know you have cash in reserve to get you over life's bumps in the road and can focus on other, more important things. 

Mortgage recasting may not be a term you are familiar with, but it should be. It's good to have as many tools in your financial arsenal as possible. And recasting may be a good way to reduce your overall mortgage costs and your monthly payments.

Today's Best Mortgage Rates

Chances are, mortgage rates won't stay put at multi-decade lows for much longer. In fact, the Fed has already signaled that it expects rates to continue increasing. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase. Click here to get started by scanning the market for your best rate.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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