Recasting—also known as re-amortizing—is a little-used option homeowners have for reducing their monthly mortgage payments. Unlike a refinance, the loan term and interest remains unchanged by the recast. However, when they’re applied to the newly reduced principal, the amount required each month to satisfy the loan by the end of its term is lower.
You must make a lump sum payment to reduce your loan balance and request a recast. While the amount required varies depending on your lender, it could be as much as 10 percent of your remaining mortgage balance. The fees, however, are likely to be lower than those required for refinancing are—as low as $250 in some cases.
How Recasting Works: A Look at the Numbers
Let’s say you took out a $200,000 home loan 10 years ago and have been paying 5 percent interest ever since. Your monthly payments have been about $1,074, and your remaining balance is about $162,288 with 20 years remaining on your mortgage term.
Suddenly, you acquire $10,000 and decide to put it towards your mortgage. You make a lump sum payment of $10,000 and ask your lender to recast the remaining $152,288. The interest (5 percent) and remaining term (20 years) stay the same. But your new loan payment will be $1,005 a month.
In essence, you’re paying $69 less a month as a result of the recast. Over 240 months, you’ll pay $16,560 less. Minus your initial $10,000 lump sum payment, that’s total savings of $6,560.
Other Requirements
Recasting is generally restricted to fixed-rate mortgages of the convention, conforming loan variety. FHA and VA loans do not allow for recasting. Jumbo loans also tend to prohibit recasting.
The time it takes to recast a mortgage tends to be longer than that required for a refinance. It may be several months before your new payment takes effect. Additionally, you must wait 90 days after closing on your original mortgage before you can initiate a recast.
Is a Recast Right for Me?
If you just bought a new home and have yet to sell your old residence, you may want to keep a recast on the table. When you finally sell your previous property, you can take your portion of the proceeds (or equity) and use it to pay down the balance on your new mortgage. A recast will then re-amortize the remaining balance, lowering your monthly obligation.
If you aren’t planning to sell other property and just want to lower the interest rate on your current mortgage, a refinance may be a better option. However, if you’re underwater—owing more than your home is worth—or your credit is poor, consider a recast. It won’t require an appraisal or a credit check.
If your goal is to pay off your mortgage sooner, making biweekly payments could be the answer. A biweekly payment program basically leads to one extra mortgage payment each year. The number of years it will save you depends on your interest rate. However, at today’s average rates, it should allow you to pay off your home four years sooner.
Are you wondering if a refinance or a recast is the better way to lower your monthly payment? We’re here to help. Please don’t hesitate to contact us with any real estate questions.
