Advantages Of Recasting A Mortgage
- You will experience an increase in cash flow.
- It allows you to save money on mortgage payments and interest.
- Recasting frees up money to invest in other properties or investments.
- There are minimal to no fees for processing a mortgage recast, depending on your bank.
- The time frame and effort required to recast your mortgage is typically minimal, with some real estate investors claiming only to have to make a phone call, sign, and notarize paperwork.
Bottom Line: What Is A Mortgage Recast
Recasting a mortgage or loan occurs when a borrower makes a big payment against the principal of their debt. Recasting your mortgage lowers your monthly payments while keeping the interest and terms the same. So, if you have a large amount of money either from a windfall or inheritance, doing a recast may be an excellent option if you want to lower your monthly mortgage bill or save on interest payments.
How Is A Recast Mortgage Calculated
In order to complete a recast, most lenders and loan servicers require that you make a minimum lump-sum payment toward the principal balance of the loan. Minimum payments vary from $5,000 to $10,000 or may be calculated as a percentage of the remaining principal balance, which can be as high as 10%.
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What Is A Mortgage Loan Recast
A mortgage recast is a feature in some types of mortgages where the remaining payments are recalculated based on a new amortization schedule. During a mortgage recasting, an individual pays an additional lump sum toward their principal, and their mortgage is then recalculated based on the new balance.
For example, lets say youre 5 years into a 30-year amortizing mortgage at 4%. Your loan size is $500,000 and the value of your property is $700,000 for a 71.4% LTV. Your monthly payment is $2,387.
Youre happy with your lender, happy with your 4% mortgage rate, have a loan that allows you to recast, and you dont want to go through the hassle of refinancing a loan and paying excessive fees. Further, you just inherited $200,000 from your late aunt.
If you use the $200,000 to pay down principal from $500,000 to $300,000, your monthly mortgage payment will stay the same at $2,387. The only thing that will change is the percentage of payment going towards principal and interest . If your goal is to increase monthly cash flow, paying down principal, without refinancing or recasting, wont help you.
But if your lender allows you to recast your mortgage, you can use the $200,000 to pay down principal, and have the remaining $300,000 amortize on a new 25-year amortizing schedule. If so, your new monthly payment would .
Should I Refinance To Get Rid Of Pmi
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To put it mildly, refinancing activity has exploded in the past year or so. As you might expect, the main reason is that interest rates are at historic lows. Many borrowers can dramatically reduce their monthly mortgage payments by obtaining a new loan with a lower refinancing interest rate.
However, what if you already have a relatively low mortgage interest rate, but you’re paying private mortgage insurance, or PMI, because you put less than 20% down when buying your home? Can you refinance to get rid of this expense? Here’s what homeowners with PMI need to know.
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How To Determine Whether A Mortgage Recast Is Right For You
One of the best ways to determine whether you should move forward with a mortgage recast is to look at what you hope to get out of your loan. Do you want to lower your monthly payments, or are you looking to access your equity as well?
There are several options for lowering your payment, but sometimes it’s hard to figure out which one is right for you. To learn more about the advantages of a mortgage recast and find out how to recast your loan, contact a Home Lending Advisor.
Types Of Loans That Can Be Recast
If you want to save on your monthly paymentswhile keeping your current interest ratemortgage recasting can be an excellent alternative to refinancing. That said, not all lenders offer the service and not all loans are eligible for recast. For example, conventional mortgages and jumbo mortgages can be recast, but FHA loans and VA loans cannot.
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Shortening Your Mortgage Term
I mentioned before that you can shorten your mortgage length paying extra principle on it every month. Weve also covered some strategies for paying off your mortgage early. Making the extra payments can cut years off your mortgage and save you tens of thousand of dollars in interest, depending on your loan terms.
For example, with most 30 year fixed rate mortgages, you pay a huge amount of interest for the first seven years or so of your mortgage. As you get closer to the end of the life of the mortgage, more of your payments go towards principal.
The primary advantage with paying off your mortgage early is the big improvement in cash flow. Once your mortgage payment is gone, youll have hundreds in extra cash each month that could be used for your other financial goals.
Mortgage Recasting Vs Refinancing: Which Is Better
A refinance loan is when you replace your current mortgage with an entirely new mortgage, usually at a lower rate. The table below shows you when it might be better to choose a recast mortgage or a refinance mortgage.
|A mortgage refinance makes sense if:
||A mortgage recast makes sense if:
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Recast Fees And Requirements
For a small fee , your lender will take your outstanding balance and remaining term and reamortize your mortgage.
This fee can range from $0 to $500 or more. You need to inquire with your lender beforehand to determine the cost, if any, as it can vary.
Some lenders may also have a minimum amount that you must pay to reduce the loan balance if a lump sum is required, such as $5,000 or more.
This lump sum payment is made in conjunction with the recast request and you wind up with a lower monthly payment as a result, though the interest rate and loan term remains unchanged.
It might also be possible to request a recast if youve been making extra payments over time and simply have a much lower balance than the original amortization schedule would indicate.
Also note that you may only be given the opportunity to recast your mortgage once during the term of the loan.
Tip: Generally, your mortgage must be backed by Fannie Mae or Freddie Mac in order to be recast. Jumbo loans may also qualify. It is not an option for FHA loans or VA loans unless its a loan modification.
Are Closing Costs Tax Deductible
Can you deduct these closing costs on your federal income taxes? In most cases, the answer is no. The only mortgage closing costs you can claim on your tax return for the tax year in which you buy a home are any points you pay to reduce your interest rate and the real estate taxes you might pay upfront.
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How To Calculate If A Recast Is Right For You
There are two ways to accomplish a major principal reduction: a recast where your monthly payment ends up lower over the same term, and an additional principal payment where your monthly payment ends up staying the same, but with a lower overall principal balance. Lets look at both of these alternatives.
For this example, lets assume a $200,000 initial loan balance on a 30-year fixed mortgage at a 4.99% interest rate. Lets say youve just freed up $40,000 you want to use toward paying off your mortgage. Different states may have slightly different lending fees that apply. Here, weve used Michigan as an example. You can check your own numbers using our amortization calculator.
Lets look at a recast scenario first.
With A Recast
What You Should Know Before Recasting
Not all loans are eligible for recasting, and your servicer isn’t required to offer the service, Hettinger says. Loans bought by Fannie Mae and Freddie Mac can be recast, he says, but Federal Housing Administration and Veterans Affairs loans can’t.
Additionally, jumbo or nonconforming mortgages might be eligible for recasting only on a case-by-case basis, Hettinger says. Some lenders charge a fee for the service, usually a few hundred dollars, so inquire about the cost.
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Mortgage Recast: When Does It Make Sense To Reamortize Your Loan
See Mortgage Rate Quotes for Your Home
Homeowners who are looking for a way to lower their monthly mortgage payments without changing their interest rate or loan terms should consider a mortgage recast. Recasting, or reamortizing, a mortgage can create both long-term and short-term savings. Read on to explore the pros and cons of recasting a mortgage, which types of loans can be recast and how to do a recast.
The Disadvantages Of A Mortgage Recast
For many people, a mortgage recast is a great way to reduce monthly payments. However, your payment may not be reduced as much as it would with a refinance. A recast isn’t for everyone. Here are some potential disadvantages of a mortgage recast:
- You keep your current interest rate. This is an advantage if mortgage rates are up since you last financed your loan. However, if rates are down, a recast won’t allow you to take advantage of a more competitive rate. In this case, refinancing might be a better option.
- You can’t take out any equity. If you want to take equity out of your home, you have to refinance.
- There may be restrictions. Not all lenders offer mortgage recasts, and not all loans are eligible for a recast . Additionally, there may be restrictions regarding how much you owe, how much you’ve paid and your payment history.
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How Do I Know If It Makes Sense To Refinance
So when does it make sense to refinance? The typical should-I-refinance-my-mortgage rule of thumb is that if you can reduce your current interest rate by 1% or more, it might make sense because of the money youll save. Refinancing to a lower interest rate also allows you to build equity in your home more quickly.
How Do You Recast Your Mortgage Loan
The process of recasting a mortgage involves the following steps.
- Determine if your loan can be recast. Not all types of loans are eligible to be recast for example, Federal Housing Administration and Dept. of Veterans Affairs loans cannot be recast. Additionally, not all lenders and servicers offer recasting services, so it is best to inquire with yours directly.
- Notify your loan servicer. You will have to make a formal request to your lender or loan servicer to recast your loan. Most lenders and servicers charge a fee of up to $500 for processing the recast.
- Make a lump-sum payment. In order to complete a recast, most lenders and loan servicers require that you make a minimum lump-sum payment toward the principal balance of the loan. Minimum payments vary from $5,000 to $10,000 or may be calculated as a percentage of the remaining principal balance, which can be as high as 10%.
On occasion, lenders will also need approval from the investor that purchased the loan to complete the recast. This is usually only the case if the loan was transferred to another party since it was brokered. As a result, it may take weeks to process your recast. It’s important to continue making your regularly scheduled payments in full until you receive confirmation that the recast is complete.
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Recast Or Refinance How To Decide
If you are eligible for a recast, there are still some questions you should ask to determine whether a recast or refinance is right for you:
- The cost: With a refinance, you are looking at a whole lot of fees. These include an appraisal fee of around $300 to $500 and closing costs between $1,800 and $4,000 depending on your credit score. If youre depositing $10,000, refinance fees could take upward of $4,500, leaving only $5,500 to be applied to your loan.
- Interest rates: If present interest rates are lower than when the loan was opened, it often makes sense to refinance, says Matt Hackett, operations manager of EquityNow. However, if present interest rates are higher, then a recast is more favorable since you get to keep your original lower rate. In an environment where rates are on the rise for the first time in several years, mortgage recasts will most likely become a more popular option, says Tammi Lindley, senior loan officer at the Lindley Team at Mortgage Express.
- How long you plan to live there: If you sell your house within five years, a refinance may not be practical and a recast may be a better option.
How To Qualify For Mortgage Recasting
The recast mortgage process has proven to be an invaluable tool for many homeowners. Unfortunately, however, mortgage recasting isnt made available to all homeowners. Mortgage recasting isnt universally offered by all lenders, nor are all mortgages eligible. Therefore, lets take a look at what you might need to qualify for mortgage recasting:
Many lenders require a minimum lump-sum payment of at least $5,000. However, others lenders will require the payment to represent a percentage of the remaining principal.
More often than not, participating lenders will require homeowners to have a certain amount of equity in the home before they can even consider a mortgage recast.
Mortgage recasting doesnt work on government-backed loans.
Most jumbo loans dont qualify to be recasted.
A great deal of lenders will require a clean history of timely payments.
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When Does A Mortgage Recast Make Sense
The most common situation where people opt for a mortgage recasting is when they are buying a new house 1st, and then selling their existing home at a later stage.
That is basically buying a new house without a sale contingency. This way they dont have to move out of their current home, find somewhere to stay temporarily and then move into the new house.
If the borrower is qualifying for both the mortgage payments, they can use the strategy of recasting a loan once they sell the current home.
There are other reasons why you might want to get a mortgage recast like a bonus from work, inheritance money, etc.
Pros And Cons Of Refinancing
Like recasting, refinancing also lowers your payment , but thats because you re-start the clock on your loan.
New features: The primary reasons to refinance are to secure a lower monthly payment, change the features on your loan, and possibly get a lower interest rate . If you get a brand-new loan, you get to choose how long it will be structured: Will it be a 30-year mortgage, a 15-year fixed-rate loan, or an adjustable-rate mortgage ?
Higher costs: Getting a brand-new loan typically costs more than a recast.
- You may have to pay closing costs, including appraisal fees, origination fees, and more.
- The biggest cost might be the extra interest you’ll pay. If you stretch out your loan over a long period of time , you’ll have to start from scratch. With most loans, you pay more interest in the early years, and you pay down most of the principal in the later years. A new long-term loan puts you back in those early, interest-heavy years.
To see an example of how you pay principal and interest, run some numbers with our mortgage calculator.
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How Recasting Works
A recast is a recalculation of your mortgage based on how much you currently owe. Presumably, you’ve paid down your principal since you first took out the mortgage. You will also be required to make an additional lump-sum payment and pay a small fee to recast. Your new mortgage terms will be based on the balance remaining after that lump-sum payment, typically for the same remaining term.
The minimum a lender might accept for that upfront, lump-sum payment can vary. Note that your monthly payment will not change significantly without a large enough lump sum.
You’ll pay off the loan with fixed monthly payments just as you’ve been doing, and the payments generally dont change over the life of your loan unless you have an adjustable-rate mortgage.
You dont have to qualify for a loan all over again.
Youll have smaller monthly paymentsin most cases.
You can keep your interest rate if you managed to lock into a good one when you initially took out the loan.
Recasting will reduce your debt-to-income ratio.
Youll most likely have to pay a fee, although they typically aren’t too steep.
Youll have to part with a lump sum of cash, which might deplete your savings.
Youll remain locked into that interest rate if you got hit with a high one when you initially took out the loan.
You could end up paying more in interest overall if you extend your loan term.