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You've probably heard of refinancing as a way to lower your monthly mortgage payments. But there's another method you may not know about: recasting. Recasting your mortgage involves making a lump-sum payment that reduces your mortgage balance and leads to a lower monthly payment.
One of the advantages of recasting a mortgage is that it's simpler than refinancing a mortgage, although recasting won't change the interest rate or the length of the loan. Here's how to get started with recasting your mortgage.
How Does a Mortgage Recast Work?
When you recast your mortgage, you pay a lump sum toward the principal you owe on your home loan. Your mortgage lender then calculates a new monthly payment based on the reduced balance. The term and interest rate of the loan stay the same.
Recasting a mortgage does come with an out-of-pocket cost, in the form of an administrative fee, but it's typically only a few hundred dollars.
A key difference between a mortgage recast and a mortgage refinance is a recast isn't a new loan. You don't have to go through an application process, and the lender won't check your credit or order an appraisal of your home. Both processes involve fees, though they're typically lower for recasting than they are for refinancing. Even with cheaper fees, however, the process of recasting tends to be much more expensive than refinancing thanks to the required lump-sum payment. The best choice for you depends on your needs and preferences.
Here's an example of how a recast might work.
Let's say you bought your home in May 2016. You currently owe $250,000, with a monthly principal and interest payment of $1,600. The interest rate for your 30-year conventional mortgage is 5%.
Now, let's say you inherited $100,000 from your Aunt Betty, and you decide to put $50,000 of that toward a mortgage recast. While you'll still have a 30-year loan with a 5% interest rate, the recast will drop your monthly payment from $1,600 to $1,179. That's a savings of $421 a month.
How to Request a Mortgage Recast
The steps you need to take for a mortgage recast are pretty straightforward:
- Review your current mortgage status. You might not be able to recast your mortgage if, for instance, you're currently behind on your loan payments or you've made late payments in the past 12 months.
- Contact your lender or loan servicer. Some lenders don't allow mortgage recasts.
- Find out how much cash you'll need. If your lender does allow mortgage recasting, ask how much you'll need to provide as a lump-sum payment. Generally, the payment must be at least $20,000, although lenders may require as much as $50,000 or as little as $5,000. The mandatory payment may be a flat amount or a percentage of the loan balance.
- Apply for a recast. Obtain a mortgage recast application from your lender.
- Make the lump-sum payment. If your application is approved, send the lump-sum payment and recast fee to your lender.
What Kinds of Mortgages Qualify for Recasting?
Only conventional loans, which are not backed by the federal government, can be recast. These include loans that "conform" to Fannie Mae and Freddie Mac standards, as well as jumbo loans that exceed Fannie Mae and Freddie Mac borrowing limits. Government-backed mortgages, such as FHA, VA and USDA loans, cannot be recast.
Pros and Cons of Mortgage Recasting
Recasting your mortgage offers pros and cons.
- Lower monthly mortgage payment
- No credit check
- No closing costs
- No home appraisal
- Low administrative fee
- Same interest rate
- Same loan term (such as 30 years)
Among the cons of mortgage recasting are:
- Not offered by all lenders
- Not all mortgages qualify
- A potentially large lump-sum payment is required
- Interest rate stays the same
- Loan term doesn't decrease. If you initially took out a 30-year loan, a recast mortgage will still be a 30-year loan.
Alternative Ways to Save Money on Your Mortgage
If for some reason a mortgage recast doesn't work out, you've still got options for saving money on your mortgage. Here are five of them.
- Refinance the mortgage to gain a lower interest rate. This might result in tens of thousands of dollars in savings on interest charges over the life of the loan.
- Make just one extra payment each year. This can potentially save you thousands of dollars in interest over the life of the loan.
- Get rid of mortgage insurance. If you made a down payment of less than 20% for a conventional mortgage, you may have had to pay private mortgage insurance (PMI). The insurance protects the lender in case you default on your loan. You can ditch PMI by speeding up mortgage payments in order to reach the 20% PMI threshold.
- Modify the mortgage if you're experiencing financial difficulties. You may be able to reduce the interest rate or principal, or extend the time you have to pay off the loan.
- Go over your budget. When you review your household spending, you may be able to find savings that can be earmarked for extra mortgage payments.
The Bottom Line
As you're considering a mortgage recast, you may want to check your free Experian credit report and free Experian credit score to see where you stand financially. By checking your credit, you can put yourself in a better position to pursue refinancing if mortgage recasting turns out not to be an option.