Mortgages can be expensive. From time to time, homeowners may need to lower their monthly payments to make their mortgages more manageable. But refinancing isn’t always an option.
If you can’t refinance your home, you might consider a mortgage recast. Recasting your mortgage can still help you save money and is oftentimes more achievable than a full-on refinancing negotiation. Today, let’s break down what a mortgage recast is, how it works, and whether it may be a worthwhile option for you.
What is a Mortgage Recast?
A mortgage recast is a financial decision where a homeowner makes a lump sum payment toward their mortgage’s principal balance. By making the payment exclusively toward the principal balance (and not paying extra interest), the loan’s total balance is reduced.
Thus, the homeowner can then make lower monthly payments until the end of the loan’s term. For example:
- A homeowner bought their house for $250,679. They made a down payment of 20%, or $50,135, bringing the principle of the loan down to $200,544. The loan is a fixed-rate loan for 30 years with an interest rate of 4.25%
- The homeowner’s monthly payment is $1217
- The homeowner then recasts their mortgage and makes a lump sum payment of $10,000, reducing the principal to $190,544
- Their mortgage monthly payments are then reduced as a result. Depending on the terms of the loan and other fees, they could be paying less than $1000 per month!
Put more simply, a mortgage recast is a potential way a homeowner can lower their monthly payment amount to save money overall. However, mortgage recasting does come with limitations. It’s also not a one-size-fits-all fix for financial trouble. Some homeowners may benefit more from refinancing their mortgages entirely.
How Does Recasting a Mortgage Work?
A mortgage recasting follows a basic step-by-step process regardless of lender, although the specifics may vary. Here’s how it works:
- First, the homeowner makes a lump sum payment to their lender. Most homeowners are required to make a payment of $5000 or more though, again, this is dependent on individual lenders and their preferences.
- The money goes straight to the principal balance for the mortgage loan and reduces the overall amount owed. It does not change the interest rate for the loan as originally agreed.
- The lender then re-amortizes the loan balance. The lender adjusts the payment schedule based on the new monthly balance due, shaving off a number of months in most cases.
- The lender may also charge servicing fees to cover the cost of their labor. This is often in the order of a few hundred dollars.
While the basic process of a mortgage recast is simple, specific steps may be required depending on your lender. Therefore, you should speak to your lender extensively before deciding on a mortgage recast.
Does a Mortgage Recast Change the Loan Term?
No, and this is one of the downsides of a recast mortgage compared to other financial options. A mortgage recast specifically lowers the principal balance of a mortgage loan. It doesn’t change the loan term directly (though it may change it indirectly depending on how much it lowers the principal balance). It also doesn’t change the interest rate.
For example, if your original mortgage contract stipulated a 4.5% interest rate, a mortgage recast of tens of thousands of dollars would not change that interest rate. That said, a recast mortgage may still result in homeowners paying less through interest over the long term. They will owe less on their principal overall, so less interest money will accrue and be owed to the lender.
Who Qualifies for a Recast Mortgage?
Mortgage recasting is only available to certain homeowners depending on the requirements of their lenders. Here’s how you can determine whether you qualify for a recast mortgage.
The Loan is Not Government-Backed
Firstly, your mortgage loan cannot be government-backed. For example, if your loan is from the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or United States Department of Agriculture (USDA), it will not qualify for a mortgage recast whatsoever.
That’s because the government has rules restricting mortgage adjustments for these accessible loans. Additionally, the majority of jumbo loans cannot be recast under most circumstances. If you want to change your loan payments, you’ll need to refinance the loan instead.
Furthermore, homeowners must meet equity requirements to pursue a mortgage recast. A homeowner has to have a certain amount of equity in the home before they qualify. Lenders may require a fixed dollar amount or require that the principal balance be reduced by a certain percentage before allowing a recast mortgage.
Minimum Payment Amount
Most lenders additionally require homeowners to recast their mortgage by a minimum amount of money, such as $5000 or so. Other lenders may require that homeowners recast their mortgage based on a percentage of the principal balance remaining.
Good Relationship with Lender
Lastly, homeowners who wish to recast their mortgages should ensure that they have good relationships with their lenders. If you are delinquent on your payments or have other financial issues, your lender will be less likely to allow you to modify your mortgage unless foreclosure is imminent.
If you make your payments on time and otherwise are a good financial partner, a lender is more likely to agree to the mortgage recast process.
Benefits of Mortgage Recasting
Recasting your mortgage can be a great idea, especially if you need to save money or lower how much cash you funnel toward your mortgage each month.
Make a Lump Sum Payment vs. Higher Monthly Payments
For many homeowners, it’s easier to make a lump sum payment and reduce their principal than it is to make continually higher monthly payments toward their mortgages. This is especially true if you come into a sudden bit of extra cash, such as a few thousand dollars from an inheritance or one-time gift.
By making a lump sum payment toward your home’s principal balance, you’ll pay less for the mortgage over the remaining loan term. You’ll also enjoy a lower monthly payment since the interest rate – while still the same as the original mortgage contract – now applies to less money overall.
Less Expensive Overall
These benefits mean that your mortgage will be less expensive and you’ll be able to save money for other purposes. In this way, a mortgage recast is similar to a refinanced mortgage. Both financial processes allow homeowners to renegotiate the terms of their contracts and save money or adjust for hard times. Both may also result in a lower monthly payment.
You can get a significantly lower monthly mortgage payment if you make a large lump sum payment. Check your lender’s minimum lump sum payment requirements, then consider going well over them!
No Credit Requirements
In addition to these benefits, recasting your mortgage doesn’t usually require specific credit scores. For example, if you are in debt and your credit score has tanked in recent months because of financial hardship, a mortgage recast may still be possible. This isn’t always the case if you try to refinance your mortgage completely.
Recasting a mortgage is less risky for a lender than refinancing a mortgage, especially if the refinancing is intended to alleviate financial burdens for the borrower.
The Same Interest Rate
A mortgage recast does not let you change the interest rates for your contract. But in some cases, this can be a benefit.
When you refinance your mortgage, you have to accept the current market rate for your property and area. If you refinance your mortgage at a bad time, you could end up with a higher interest rate for your new mortgage than you had before.
On the flip side, if you recast your mortgage and the market conditions are unfavorable, you don’t need to worry about your interest increasing. You could do yourself a major financial favor by recasting your mortgage to reduce the principal and still keep the low-interest rate you got during more favorable market conditions.
Downsides to Mortgage Recasting
While a mortgage recast can be beneficial, there are some potential disadvantages to keep in mind when choosing to do it.
May Not Qualify
As mentioned earlier, your loan may not qualify for a recast mortgage if it originated from a government program or if it is part of a jumbo loan. In these cases, a refinancing deal could be your only option.
Some Lenders Don’t Allow Recast Mortgages
Even if you qualify, your lender may not allow you to recast your mortgage under any circumstances. Instead, they may just let you put any lump sum payments toward the next month’s payment rather than reduce your principal by any meaningful amount.
Recast Alternative: Should Homeowners Refinance or Recast?
While a recast mortgage can be a great option for homeowners in dire financial straits, pursuing a mortgage refinance can also be smart. Refinancing your mortgage involves renegotiating a new mortgage contract with your same lender.
When you refinance your mortgage, you could end up with a different minimum monthly payment, different interest rate, and even a different term for the loan. However, refinancing your mortgage usually requires:
- A good relationship with your lender
- A certain credit score
- A good history of monthly payments toward your mortgage
Therefore, refinancing your mortgage is not always possible, especially if your credit score has decreased in recent months. Generally, you should refinance your mortgage only if your financial situation has changed permanently.
If your financial situation is the same but you wish to lower your monthly mortgage payments, recasting your mortgage may be wiser.
At the end of the day, a mortgage recast can save you money both in the short and long term and make you feel more comfortable with your current mortgage loan. The money you save thanks to a mortgage recast could help you get ready to buy a new home in the town of your dreams.
Of course, Homes by Ardor can help you find the perfect house for you and your family. You can skip house hunting completely and allow us to locate the ideal property for you. When the time comes to sell your current home, you can also use our service to find a willing buyer on your schedule and move on time for your next job. Contact Homes by Ardor today to learn more!
Kris Reid is the CEO of Ardor SEO, a company that helps real estate professionals get more leads and customers to predictably grow their business.
Over the years, Kris acquired extensive knowledge of SEO and its practical applications in various industries, with the main focus on real estate.
In 2021 Ardor launched the Icons of Real Estate Podcast to share proven strategies from the top producing icon agents with the real estate community.
After obtaining the real estate license in 2022, Kris joined eXp Realty and launched Homes by Ardor, the platform that was built to be the fastest way to buy or sell a house. Homes by Ardor also provides leads for its partner companies and realtors.