Understanding the concept of Mortgage Recasting
What is a Mortgage Recast and How Does it Work?
When a borrower makes a substantial lump-sum payment towards the principal of their mortgage, it results in a loan reduction known as a mortgage recast. This new balance is then used to recalculate the monthly payments on the loan. Let’s delve deeper into the definition and process of a mortgage recast to determine if it suits your needs.
Understanding Mortgage Recast
A mortgage recast involves your current lender adjusting the monthly payments on your loan based on the remaining balance and term. By providing a lump sum towards the principal, the lender recalculates a new monthly payment amount without changing the interest rate or term. This process, also known as re-amortization, allows you to pay off your mortgage sooner or lower your monthly payment.
For example, if your original mortgage was $200,000 and you recently paid an additional $15,000 towards the principal, your lender can recast the balance to help you pay off the mortgage sooner with the same monthly payment amount. If you prefer a lower monthly payment, you can ask your lender to adjust the balance over the remaining loan term.
Process of Mortgage Recast
Once you decide to pursue a mortgage recast, contact your lender to inquire about the possibility. Complete the recast application provided by your lender and make the required lump-sum payment to initiate the process. Your lender will then restructure the payment schedule for the remaining term, resulting in lower monthly payments while keeping the interest rate and term unchanged.
It is important to note that mortgage recasts are only applicable to conventional loans and not available for government-backed mortgages like FHA, VA, or USDA loans.
Mortgage Recast vs. Mortgage Refinance
While both mortgage recast and mortgage refinance can help save money on your mortgage, they are different approaches. Mortgage recast involves lowering monthly payments through a lump-sum payment, while refinancing replaces the existing loan with a new one, offering opportunities to lower interest rates, reduce payments, or access cash based on equity.
If your financial situation has improved since taking out the mortgage and you are eligible for a lower interest rate, refinancing may be a viable option for you.
Pros and Cons of Mortgage Recast
Pros
Cons
A mortgage recast can reduce monthly payments, eliminate closing costs, and maintain the same rate and term. However, it may not be available with all lenders, necessitates a significant upfront payment, and could incur additional fees.
Consider a mortgage recast if you seek to lower your monthly mortgage payments after receiving a significant sum of money. If a recast is not feasible, alternative strategies like refinancing or making extra payments can also help save money on your mortgage.
