Want to reduce the amount of your monthly mortgage payments for the remaining life of your home loan? Then a recast mortgage may be the option for you. Although not as common as refinancing, there are benefits to a recast mortgage that you can't get through refinancing.
Here are all the details you need to know about recasting your mortgage and if it's the best option for you.
What does recasting a mortgage mean?
Although it sounds more like a fishing term than a financial one, recasting your mortgage is where you make a lump sum payment (usually $5,000 or more) toward your mortgage premium to reduce the amount you pay toward your loan balance.
Here's how it works.
Once your lender agrees to recast your mortgage, they'll put the money toward the principal balance of your home loan. From there, they'll re-establish your mortgage as if you had paid a larger down payment. You'll still have the same length of the mortgage as you do now, you'll just pay less each month.
Here's an example.
Let's say you took out a 30-year mortgage 10 years ago for $250,000 and you put down a 20% down payment, making your loan amount $200,000. Let's say you have a 5% interest rate. Your monthly payment is $1,074, but because you don't pay the same amount to your principal and interest, most of that monthly amount goes toward interest at first.
Now that it's been a while and you have become more established in your career, and let's say your boss gave you a $12,500 bonus for having a good year. You plan on traveling in a few years and want to save money on your monthly payment to allow for some travel money, so you decide to put that $12,500 toward your mortgage.
So, you call up your lender and ask if they can recast your mortgage. You go to the bank and pay the small fee and put the lump sum payment toward the premium of your existing loan.
Your lender then recasts your mortgage as if you had paid a $62,500 down payment, making your monthly payments to $1,007, but keeping your loan term the same.
How do I qualify for a recast mortgage?
The type of mortgage you have determines your eligibility.
Any government-backed loan is not eligible for a recast mortgage. Those include:
- VA loans
- FHA loans
- USDA loans
- Adjustable rate mortgage
May be eligible on a case by case basis:
- Jumbo loans
- Non-conforming loans
Loans through Fannie Mae or Freddie Mac are typically eligible for a recast mortgage.
The next thing you'll need to look at is your lender. If your lender is a small bank or credit union, chances are slim that they'll even offer recast mortgages. Banks such as Wells Fargo and Bank of America do offer mortgage recasts, so be sure and check with your bank to see if it's even possible.
Recast Mortgage vs. Refinancing
You are probably more familiar with the term refinancing than you are with recasting. Here are the benefits and drawbacks to both so you can decide which is best for your situation.
Recast Mortgage Benefits
- No credit check
- Lowers monthly payments but keeps loan term
- Low fee ($250)
- Easy to qualify for if you have the money and the right bank
- Great if interest rates have increased since getting your loan
Recast Mortgage Drawbacks
- Doesn't change the amount you owe to your loan over the long-term
- Many lenders don't offer it
- Small amount it takes off per month may not be worth it
- You still pay the same amount of interest ($186,512 with a $200,000 loan and a 5% interest rate)
- Must have a lump sum of at least $5,000 in most cases
A recast mortgage makes sense if you anticipate needing smaller monthly payments for the rest of your loan. It doesn't really make sense if you are wanting to pay less toward your house as a whole, as the loan balance remains the same.
Now for the refinancing comparison.
- Lower interest rates (if applicable)
- New loan structure option
- Lower monthly payment
- Option to use a line of credit from house
- Appraisal fee ($300-$500)
- Closing costs ($1,800-$4,000)
- Resets the term of your loan
- Credit Check
If you are planning on selling your house in the next five years, refinancing your house may not make sense, especially with the amount of money you will be paying without reaping much of the benefits.
One Last Option
Recasting your mortgage is a great idea if you want to reduce your monthly payments without paying a large fee. It could work to help you make lower payments while you wait to sell in a few years, for example.
If you plan on staying in your home for a while longer, refinancing may be just the ticket. It could provide you with a lower interest rate in the long run, and while it does reset the term of your loan, it could end up saving you money.
If a recast mortgage and refinancing aren't for you, you may want to simply pay more money toward your mortgage each month. While this won't affect the amount that's due from your lender on a monthly basis, you will pay off your mortgage faster and pay less interest because of it.
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