What is a recast mortgage? While it sounds more like a fishing trip than a financing tool, it's actually where you pay off a lump sum of your principal (that's the money you owe), then have your lender "recast" or reamortize the rest so you can lower your monthly payments.
Recast mortgages are rare, at least compared with the more typical way homeowners reduce their mortgage payments by refinancing. Nonetheless, it's well worth considering in certain circumstances.
Here's everything you need to know to decide whether a recast or refinance is right for you.
What is a recast mortgage?
To make the idea of a recast simpler, imagine your Aunt Susan has died and left you $10,000, or you get a bonus at work. Sure, you could put that money in a CD or other investment, or spring for a kitchen remodel. However, if lowering your monthly mortgage payments sounds far sweeter, then a recast is the way to go.
"Recasting your mortgage is a great option if you want to lower your monthly payments and have the funds to make a lump sum payment to your lender," says Randall Yates, founder and CEO of The Lenders Network.
The process of recasting is fairly simple: You head to your bank, fork over your money, and pay a small fee to recast your mortgage.
From there, your lender will use that money you've offered up to pay off your principal. It's as if you've made a bigger down payment on your loan. If, say, you'd originally put down $50,000 and borrowed $200,000 to pay for a $250,000 house, after a recast, you've now put down $60,000 and owe only $190,000 (actually a bit less, if you've been paying your mortgage for a while already).
So now that you owe less, your lender will recalculate monthly payments over the life of your loan. For instance, if you owe $200,000 on a 30-year fixed loan with 5% interest, your monthly payment is $1,397. Recast so you owe only $190,000, your monthly payment will dip to $1,343, giving you an extra $54 a month (crunch your own numbers and see how much you'll save with an online mortgage calculator).
Refinancing vs. recasting a mortgage: What's the difference?
When you refinance a mortgage, your loan is actually closed, then reopened as a new loan with new terms (length of loan and/or interest rate). Refinancing also comes with a bunch of steps, including a home appraisal and related fees. As a result, a refinance also takes time to finish (typically 30 to 45 days).
A recast, in contrast, is much simpler: Your loan life, terms, and interest rate remain as is; the only thing that changes is you get to make lower monthly payments.
"Mortgage recasting is a much simpler process than refinancing," says Yates. "There is no income verification or credit check needed. The entire recasting process can be completed in less than 30 days."
A recast is also different from merely sending in a lump sum to prepay your mortgage early. In those cases, your monthly payments remain the same. You will just finish off paying your mortgage earlier.
Requirements for a recast mortgage
Mortgage recasting is not available to all. Here are a few requirements for a recast:
You must have a conventional loan. "Government-backed loans such as FHA or VA loans are not eligible for recasting," says Yates.
Your bank must offer recasting. Most larger banks like Wells Fargo or Bank of America offer a recast, but smaller local banks or credit unions may not offer the option.
You must have enough money. Most lenders require a minimum $5,000 payment to recast a loan. As such, recasting can be a good option only with large lump sums, rather than smaller amounts arriving via paychecks if, say, you got a raise at work.
Recast or refinance? How to decide
If you are eligible for a recast, there are still some questions you should ask to determine whether a recast or refinance is right for you:
The cost: With a refinance, you are looking at a whole lot of fees. These include an appraisal fee of around $300 to $500 and closing costs between $1,800 and $4,000 depending on your credit score. If you're depositing $10,000, refinance fees could take upward of $4,500, leaving only $5,500 to be applied to your loan.
Interest rates: "If present interest rates are lower than when the loan was opened, it often makes sense to refinance," says Matt Hackett, operations manager of EquityNow. However, if present interest rates are higher, then a recast is more favorable since you get to keep your original lower rate. "In an environment where rates are on the rise for the first time in several years, mortgage recasts will most likely become a more popular option," says Tammi Lindley, senior loan officer at the Lindley Team at Mortgage Express.
How long you plan to live there: If you sell your house within five years, a refinance may not be practical and a recast may be a better option.
Pros of a recast mortgage
Reduces monthly payments and principal
Easier than a refinance
No appraisal required
You keep your original loan and interest rate
No credit check
You don't have to stay in home a certain amount of time to recoup refinance fees
You can do it more than once, whenever you receive lump sums above $5,000
Cons of a recast mortgage
Offered only by mostly larger banks
Available on loans from institutions such as Fannie Mae or Freddie Mac (not FHA or VA)
Doesn't reduce the interest rate
Doesn't shorten overall mortgage term
Liquid cash reduced and tied up in equity
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