Mortgage Recasting: What It Is And How It Works
Key takeaways
- Mortgage recasting means that you can pay a lump sum towards your mortgage with a purpose to cut back your remaining month-to-month funds and curiosity.
- Whenever you recast your mortgage, you will hold the identical rate of interest and time period.
- Recasting is perhaps easier and cheaper than refinancing, relying on how a lot you pay within the lump sum.
What’s a mortgage recast?
Mortgage recasting is a type of prepaying your mortgage. To recast your mortgage, you’ll merely make a lump-sum cost in the direction of the steadiness. Your lender will then reamortize the mortgage with the smaller steadiness and new, decrease month-to-month funds. Though your mortgage has been recast, you’ll retain the identical rate of interest and mortgage time period.
Not all sorts of mortgages qualify for recasting in the usual sense. You possibly can’t usually recast an FHA mortgage, VA mortgage or USDA mortgage — though your lender would possibly use the recasting technique to change your mortgage in case you’re struggling to pay.
Your lender would possibly require you to scale back your steadiness by a minimal quantity with a purpose to recast it. Most, if not all, lenders require you to be in good standing with funds.
How does recasting a mortgage work?
Recasting your mortgage doesn’t imply you’ll repay your mortgage early. Your new payoff schedule matches what it will have been initially, however with every month-to-month cost adjusted to replicate the brand new steadiness.
To recast your mortgage, you’ll must make a lump-sum cost. Some lenders would possibly require you to pay a certain quantity, in addition to a payment of a number of hundred {dollars}. (In case your lender doesn’t require a minimal discount, know that solely placing up a small quantity received’t be sufficient to justify the recast.)
When you’ve eradicated a portion of your steadiness with that lump sum, your lender will reamortize the mortgage. This implies it’ll calculate new month-to-month funds, together with principal and curiosity, and map them out on a reimbursement schedule.
Mortgage recasting vs. refinancing
There’s an enormous distinction between recasting a mortgage and refinancing one, though each may also help you get monetary savings.
Refinancing requires that you simply apply for a brand-new mortgage and pay the closing prices that go along with it. The brand new mortgage would repay your current mortgage, so that you’ll find yourself with a brand new mortgage in addition to a brand new rate of interest. Debtors usually refinance to get a decrease rate of interest, to go from an adjustable-rate mortgage to a fixed-rate mortgage or to money out among the fairness of their house.
Recasting is a a lot easier course of. With recasting, you’re holding your current mortgage, solely adjusting the amortization. You wouldn’t be capable of get a decrease rate of interest or a shorter mortgage time period with recasting, such as you would possibly with refinancing. Then again, in case your rate of interest is already low — or at the very least decrease than prevailing charges — then a lot of the benefit of refinancing is gone. In that case, a mortgage recast is perhaps preferable to a refinance as a result of it means that you can hold your present charge.
Professionals and cons of mortgage recasting
Professionals of recasting mortgage loans
- Lowers your month-to-month funds
- No must reapply or requalify for a brand new mortgage
- Retains your present rate of interest
Cons of a recasting mortgage loans
- Doesn’t shorten the size of your mortgage
- Retains your present rate of interest, which is perhaps too excessive
- Ties up extra of your cash in your house
- Typically features a payment
Easy methods to calculate your mortgage recast
If a mortgage recast is the correct transfer in your funds, make sure that the mathematics checks out. You possibly can estimate your new month-to-month cost after the recast with the assistance of Bankrate’s amortization schedule calculator.
In case you nonetheless have questions on your potential financial savings, seek the advice of together with your mortgage lender. A mortgage officer may also help you run the numbers and perceive the very best technique in your scenario.
Mortgage recasting exampleSay your 30-year mortgage carries a steadiness of $200,000 at a 5 p.c rate of interest. The month-to-month cost is $1,074 (excluding escrow funds).
After 10 years, your excellent mortgage steadiness is $162,684. You then resolve to make a $50,000 lump sum cost to recast the mortgage, plus pay a $250 recasting payment. That reduces the steadiness of your mortgage to $112,684.13. Your month-to-month cost for the following 20 years will drop to $744, $330 lower than your authentic cost.
| Quantity spent with out recasting | Stability left with out recasting | Quantity spent with recasting after 10 years | Stability left with recasting after 10 years | |
|---|---|---|---|---|
| 10 years | $128,880 | $162,684 | $179,130 | $112,684 |
| 15 years | $193,320 | $135,767.82 | $223,770 | $94,040.28 |
| 20 years | $257,760 | $101,224.54 | $268,410 | $70,113.70 |
| 30 years | $386,640 | $0 | $357,690 | $0 |
Mortgage recasting FAQ
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A mortgage recast would possibly make sense if in case you have sufficient cash to do it. You shouldn’t recast your mortgage in case you want the funds for different functions. In case you don’t have already got an emergency fund, for instance, begin there as an alternative. Additionally, assume by your present and future monetary wants. In case you plan to retire in a couple of years, a recast mortgage may also help you retain bills low while you’re on a hard and fast revenue. Equally, in case you’re planning to take a pay reduce to pursue a brand new profession path, recasting may also help you make your price range extra manageable. Earlier than you commit this lump sum to your mortgage, discover your whole choices. You would possibly need to discuss to a monetary advisor. Investing that cash is perhaps a wiser transfer, particularly if in case you have a low rate of interest in your mortgage.
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Mortgage recasting differs from merely making principal funds as a result of it reamortizes your mortgage. Merely making further principal funds doesn’t reamortize your mortgage.
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This varies from lender to lender — and keep in mind, some lenders don’t enable for a mortgage recast in any respect. Usually, you’ll must have made a number of months of on-time funds with a purpose to discover a recast mortgage. In some instances, this is perhaps as quick as six months.
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To save lots of in your mortgage, think about refinancing if you may get a decrease rate of interest, eliminating non-public mortgage insurance coverage (PMI), making further funds or — in instances of economic hardship — requesting a house mortgage modification.
