How Does Recasting a Mortgage Work? Recasting a mortgage involves making a lump sum payment toward your mortgage principal, which allows the lender to recalculate your amortization schedule based on the lower balance owed. This lowers your monthly payments while keeping the original loan term and interest rate.
Recasting differs from refinancing in that you remain on the current mortgage and avoid the costs and fees associated with a new loan. The lender simply adjusts the payment schedule after receiving a principal prepayment. Recasting provides flexibility to modify payments if refinancing isn’t warranted.
When to Consider Recasting
There are several common scenarios when homeowners might want to consider recasting their mortgage:
- Interest rates have dropped significantly since you obtained your original mortgage. Refinancing could save money but involves closing costs. Recasting allows you to benefit from lower rates without refinancing fees.
- You have come into a large sum of money through an inheritance, bonus, or other source. Putting extra funds directly toward the principal is an efficient way to reduce your mortgage debt.
- You want to reduce your monthly payments to free up cash flow for other financial goals. A recast can lower payments without refinancing.
- You can pay off your mortgage early and want to reduce total interest costs over the life of the loan. Recasting facilitates accelerated payoff through principal prepayments.
How Does Recasting a Mortgage Work?
The process for recasting a mortgage loan includes:
- Contact your mortgage lender – The lender must allow recasting, so confirm their policies. Inquire about any associated fees, often $100-$500.
- Pay down a large lump sum on your principal – To sufficiently lower payments, contribute a sizable amount, usually at least $50,000.
- Lender recalculates amortization schedule – After the paydown, the lender reamortizes based on the updated lower principal balance.
- Lower monthly payments – With less principal owed, the lender stretches the remaining payments over the original term while keeping the interest rate unchanged.
Benefits of Recasting
There are several advantages to recasting a mortgage over other prepayment options:
- Make extra payments without refinancing – Recasting allows prepaying the principal while avoiding the costs and documentation of taking out a new loan.
- Can skip appraisal and escrow analysis – Since you aren’t obtaining a new mortgage, certain origination fees can be avoided.
- Lower monthly payments free up cash flow – The revised payment savings generated can be allocated toward other financial goals.
- Pay off the mortgage faster and reduce interest paid – Putting down a sizable lump sum prepayment accelerates payoff and provides interest savings over the life of the loan.
Risks and Drawbacks
While recasting has many benefits, there are also some potential downsides to consider:
- Need funds available for large principal payment – You must have access to substantial extra savings to make the lump sum contribution worthwhile.
- Lender may charge a recast fee – Expect a fee from $100 to $500, which reduces net savings. Shop lenders to compare policies.
- Interest rate stays the same – Without a full refinance, you forgo potential savings if rates have dropped significantly since obtaining your original mortgage.
- Temporary payment increase – If making the lump sum payment in its own separate month, you’ll have a higher payment just that month before the recast takes effect.
Timing Considerations
Optimal timing for recasting includes:
- When you have extra funds available – Recasting requires accessible savings to put down on principal, so line up funds.
- Favorable interest rate environment – If rates have dropped 1% or more since obtaining your mortgage, recasting can be advantageous. Monitor rate trends.
- Before closing a refinance – If you have a refinance underway but can recast earlier, you may be able to lower payments sooner.
- At least 60 days before a home appraisal – If planning to refinance, recast far enough in advance so the appraisal accurately reflects increased home equity from the paydown.
Alternatives to Recasting
While beneficial in many cases, recasting has alternatives to assess:
- Traditional mortgage refinancing – If interest rates are sufficiently lower, refinancing may offer more savings long-term than a recast.
- Making additional principal payments – Most lenders allow some additional contributions to principal each month, such as an extra $100 or $200.
- Paying down higher interest debt – In some cases, focusing funds on higher APR credit card or auto debt may make sense over recasting a lower APR mortgage.
- Investing funds instead – Depending on your risk tolerance and investment returns, investing your extra funds may theoretically earn more than mortgage interest savings, especially considering taxes and inflation.
Tax Implications
In terms of taxes, recasting a mortgage itself has no direct implications or impacts. However, a lower principal balance can affect mortgage interest deductions on your taxes going forward. If you claim the mortgage interest deduction, be sure to consult a tax professional regarding any changes.
Eligibility Requirements
Eligibility for mortgage recasting depends on your lender’s policies. Typical requirements include:
- Good standing on your current mortgage – Most lenders require your payments to be current with no history of delinquencies or defaults.
- Minimum 5 years remaining on loan term – Many lenders set a remaining term threshold to make a recast worth administering.
- Minimum payment amount – Lenders may specify a minimum monthly payment, such as $500, to recast.
- Limits on Frequency – You may only be allowed to recast once per 12-month period, for example.
Conclusion
Recasting a mortgage by making a lump sum payment toward your principal balance can be an effective way to reduce your interest costs and monthly payments without undergoing a full refinance. Run the numbers carefully and consult your lender to see if recasting makes financial sense for your situation. While not right for everyone, for some, a recast provides a happy medium between making extra payments and refinancing.
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