Find out everything there is to know about Loan Recasting.
If you are a homeowner who wants to reduce the amount of money they pay on their monthly mortgage payment as well as save additional money on interest then you might want to consider a loan recast.
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What is Recasting a Loan?
A loan recast or mortgage recasting refers to a borrower making a large, lump-sum payment towards their mortgage’s principal balance. In exchange, their lender reamortizes the loan which means your loan is reduced to reflect the new balance. You can use a reamortize mortgage calculator to figure out what your new balance would be if you decide to recast your loan.
Recasting your loan will cut your monthly payments along with the amount of interest you will have to pay over the life of the loan. However, it will not affect the interest rate or the term of your loan.
Mortgage recasting can offer up to three benefits that are attractive for homeowners who have a little extra cash to pay down the balance.
The benefits include:
- Lower monthly payments.
- Less interest paid over the life of the loan.
- A low interest rate will stay low.
How Loan Recasting Works
To recast their loan, borrowers are required to make one large lump-sum payment towards the loan principal. Lenders usually require an amount of $5,000 or more in order to recast a mortgage. The remaining balance is then amortized so the monthly payments can be reduced. There are usually fees associated with recasting that can vary by lender. However, these fees do not typically exceed a few hundred dollars.
Recasting will not only result in lower monthly payments but borrowers will also have the luxury of paying less interest over the life of the loan.
How Much Does it Cost to Recast a Mortgage?
For example, if your 30 year mortgage has a principal balance of $200,000 with a 5 percent interest rate, you might have to pay $1,200 per month. But if you spend a total amount of $50,000 to recast your mortgage including a $250 recasting fee, you can save almost $35,000 in interest payments and around $300 per month in mortgage payments that you have to make monthly. However, the money you use to recast the loan will no longer be available to invest.
One thing to keep in mind is, recasting will not reduce the term of your mortgage, it will only reduce what you have to pay each month.
However, before you get excited about having to make lower monthly payments, the first thing to make sure of is whether your lender even offers recasting or not since many lenders choose not to. It is also something that is not normally advertised. However, most of the big banks like Chase, Bank of America and Wells Fargo tend to offer it.
Moreover, you should also determine if the kind of mortgage you have can even qualify for recasting. Some types of loans such as VA loans and FHA loans cannot be recast.
What is the Difference Between Recasting and Refinancing a Loan?
The difference between recasting and refinancing a loan is not a minor one. Even though they both help borrowers save money, recasting can be easier than refinancing since it requires you to have only a lump-sum of money in exchange for lower monthly payments.
With recasting, you are still keeping your existing loan and only adjusting the amortization. You would not be able to get a lower interest rate with recasting that you might be able to get with refinancing. However, if your interest rate is already at a low then getting refinancing could have a negative effect especially if the interest rates currently are higher.
Refinancing will require you to apply for a brand new loan and pay all the fees that a brand new loan requires you to pay like closing costs and appraisal. This new loan would help pay off your existing loan so it is likely that you end up with a new mortgage when you were just looking to get new interest rates.
This is typically done to get a lower interest rate or to change your adjustable-rate mortgage to a fixed-rate mortgage. However, if you already have a fixed-rate mortgage that has a low interest rate, a refinancing would not be the best option for you. But on the other hand, if you have low interest on a 30 year fixed-rate mortgage and want to make lower payments every month, you might want to consider recasting your loan.
Mortgage Recast: Pros and Cons
Recasting your mortgage can seem appealing since it is a fairly easy process and a relatively inexpensive way to lower your monthly payments if you can afford to. Here are a few pros that might make you consider recasting your existing mortgage:
- It can lower your monthly payments by making one lump-sum payment.
- If you choose to recast your loan, you can avoid having to requalify for a new loan.
- If you have a low interest rate, recasting your loan will keep it low.
However, there are a few drawbacks of mortgage recasting as well. The biggest financial drawback of recasting is the fact that you are putting a large sum of money into equity. There are a few more reasons why you might want to rethink recasting your loan:
- Recasting your loan will not shorten the length of your mortgage.
- Your interest rate will stay the same when you recast your loan which can be a disadvantage if you have a high interest rate and are looking to change that.
- Most of your cash will be tied up in equity.
- The lender will charge a fee to recast the loan which will typically be around a few hundred dollars.
To answer the question, “what is recasting a loan?”, it is an easier and lesser-known option for homeowners than refinancing is.
This can be a good option for people who recently came into a large amount of money such as a bonus received at work, an inheritance or winning a lottery. This money is then used to pay the amount needed to recast so that some money can be saved every month in the future.
However, considering the current climate of relatively low mortgage rates and a strong market, recasting your loan may not be a smart decision.