Takeaways
- Recasting is trading an old mortgage for a new one with less principal.
- Recasting allows you to keep your original interest rate and terms.
- Recasting requires a large payment toward your original outstanding principal.
- Recasting increases mortgage affordability by lowering payments.
- Many mortgage providers limit the number of times you can recast your mortgage.
What Is Recasting?
Recasting, also known as re-amortization, is a financial strategy in which you adjust the repayment schedule of a mortgage by making a large payment toward the unpaid principal balance without changing the original mortgage's terms or interest rate.[1] Practically, you might be able to make this large payment to recast your mortgage after a big bonus payment, inheritance, or another financial windfall. Alternatively, if you get a raise or promotion, you could apply the extra earning toward a large payment.
Here's how it typically plays out: You have been diligently making mortgage payments and suddenly receive a substantial amount of money, like a bonus or gift. You can use this bolus of money to help pay off your mortgage and increase its affordability. To do this, you could recast your mortgage.
If you recast your mortgage, you make a one-time payment towards your principal balance. Then, your lender recalculates your remaining loan balance based on the reduced principal amount and issues a new loan with the reduced principal amount. The critical thing to remember is that your interest rate and loan terms stay the same.
Next, the lender spreads out the remaining balance over the rest of your loan term, or you can choose to recast it over a different period. For example, if you have a 30-year-fixed-rate mortgage, you can choose to keep your loan term at 30 years. Your monthly payment decreases because you have a lower principal balance, using your old interest rate, on the new term. Simply put, recasting allows you to lower your monthly mortgage payments without going through the hassle or expense of refinancing.
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How Does Recasting Work?
Mortgage recasting allows you to prepay your mortgage gradually. You start by making a sizable lump-sum payment toward your unpaid principal balance. After this payment, your lender adjusts your loan to reflect the reduced balance, resulting in lower monthly payments. Even with this adjustment, your interest rate and loan term stay the same.
Only some types of mortgages qualify for recasting in the conventional sense, so check with your mortgage provider to see if your mortgage qualifies. Jumbo loans and conventional loans often offer recast opportunities. However, FHA, VA, or USDA loans typically aren't eligible for recasting, although lenders may use similar methods to help you if you are facing financial challenges.
Your mortgage provider might also require a minimum reduction in your principal balance to qualify for recasting. Additionally, most lenders insist on maintaining a good payment history to be eligible. You should make on-time mortgage payments because your payment history feeds into your credit report and credit score.
Recasting your mortgage doesn't automatically mean you'll pay it off sooner. Instead, the new payment schedule mirrors the original one, but each monthly payment is adjusted to fit the updated balance. You'll need to make a minimum lump-sum payment and a fee to recast your loan. Your recast fee is usually around several hundred dollars and is charged by lenders to process mortgage paperwork and issue you a new mortgage. As part of the recasting process, your lender will readjust your loan by recalculating your new monthly payments.
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How Much Does Recasting Cost?
Most lenders will ask for a minimum payment of between $5,000 and $10,000 to bring down your loan principal. Some lenders might request a percentage amount, such as 20% of your outstanding balance. To qualify for recasting, you must ensure you can provide these funds by a specific deadline set by the lender.
Also, the upfront payment should be enough to significantly lower your monthly payment once the lender adjusts your loan. Lenders typically apply an administrative fee of $150 to $250. This is significantly lower than the fees associated with mortgage refinancing, which range from 2% to 5% of the loan amount.
Before you pull the trigger, you can ask your mortgage lender to provide estimates of your new monthly principal and interest payments based on the size of your principal payment. Remember that your interest rate and the remaining years until the payoff date remain the same. It is also worth remembering that mortgage recasts solely adjust your principal and interest payments; your escrow payments stay separate and virtually unaffected.
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When to Recast Your Mortgage?
Depending on your circumstances, there are several advantages to recasting your mortgage. Here are common reasons it can be a good idea to recast your mortgage:
- Reducing Mortgage Size: Recasting can be a smart choice if you have a mortgage that is too big for your budget. Even if you have made on-time payments for several years, you might realize that your monthly payment is stretching your budget too far.
- Boosting Net Worth: Net worth measures your overall financial health. It has two main financial levers: increasing your assets – emergency funds, stocks, bonds, real estate – or reducing your debts. Reducing your mortgage is a major lever to reduce your mortgage liability and increase your home equity.
- Decreasing Your DTI: Recasting reduces your total debt outstanding by default. Recasting could be a terrific option if you are about to make another purchase or simply want to decrease your debt load. Lowering your mortgage improves your debt-to-income ratio and leaves you with more disposable income each month.
- Multiple Properties: Mortgage recasting also tends to be helpful for homeowners who are managing multiple properties. You may have recently purchased a new home while still holding onto your previous one. Recasting the mortgage on your old property can help you more effectively cope with the financial strain of managing two mortgages simultaneously.
- Lower Monthly Payment: Mortgage recasting is also an appealing choice for those who want to reduce their monthly payments without changing their loan terms. Recasting is particularly beneficial if you have received a substantial amount of money and choose to allocate a portion toward your loan principal. This will decrease the amount you owe and prompt a recalculation of your monthly payments.
- Purchasing a New Home: It is also worth mentioning that mortgage recasting can be a perfect choice if you happen to be transitioning between homes. When the sale of your old home does not sync up with your timeline to purchase a new home, recasting allows you to reduce your new mortgage payments once the sale is finalized.
Smart Tip:
Recasting your mortgage when interest rates are low can help you secure a low interest rate on a lower principal. This combination can help your wallet for years. It’s best to do this when inflation and mortgage interest rates are low
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5 Steps to Recast Your Mortgage
Recasting a mortgage is pretty straightforward. Here are the steps you should follow while going through the recasting process:
1. Check Your Mortgage Status
Take a moment to review your current mortgage status and ensure you are eligible for their recast requirements. If you have fallen behind on payments or have a history of late payments in the past year, you might not be eligible for recasting
2. Contact with Your Lender
Call or visit your lender or loan service provider to learn more about their mortgage recasting policies. Keep in mind that not all lenders offer this option. If you are about to buy your first home, asking your mortgage provider about this can ensure you have this arrow in your quiver if you want to implement it later.
3. Calculate the Required Payment
Determine how much you must pay toward your principal to qualify if your lender allows mortgage recasting. Typically, this amount falls within the $20,000 to $50,000 range, although it could sometimes be as low as $5,000. Some lenders specify a fixed dollar amount or a percentage of your remaining loan balance. You want this quantum of capital to be meaningful and to lower your monthly mortgage payments.
4. Complete a Recast Application
Ask your lender for a mortgage recast application and have them walk you through the application process. This usually involves filling out simple paperwork for your new loan. Make sure your original loan documentation is set to streamline the process.
5. Send Your Payment and Pay Fees
Once your recast application is approved, it is finally time to pay your lump-sum payment as instructed by your lender. You can usually do this with a check delivered to your mortgage lender or online payment via your mortgage portal. You will be billed separately for any applicable recasting fees.
Smart Summary
Under the right circumstances, recasting your mortgage can be a smart financial move. Whether you want to be mortgage-free or reduce your monthly mortgage payments, analyzing strategies to reduce your debt load can increase your credit score, enhance your debt-to-income ratio, and improve your net worth. Still not sure if a mortgage recast is the right move? Consult with a financial advisor or professional to analyze your best options.
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(1) PenFed Credit Union. What is a Mortgage Recast and How it Works. Last Accessed January 15, 2025.
