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What Is Mortgage Recasting?

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Who doesn’t want a smaller monthly mortgage payment? If you have a little extra cash on hand and want to lower your monthly obligation, you might consider recasting your mortgage.

When you have a fixed-rate mortgage, the principal and interest portions of your monthly mortgage payments stay the same over the life of your loan. But if you’re able to dedicate more cash to your home than your original down payment, one path to adjust your monthly payment is to recast your mortgage.

This article gives you an in-depth explanation of mortgage recasting, how it works and whether it might make sense for you.

What is mortgage recasting?

Mortgage recasting is a transaction that lowers your monthly mortgage payments after paying your lender a lump sum of money toward your remaining principal. If you’ve recently received a financial windfall from a company bonus, an inheritance or a tax refund, you could benefit from recasting your loan.

Once you pay your lender, your loan is then reamortized — meaning your monthly payments are recalculated — based on your new, lower principal balance. The interest rate and loan term attached to your mortgage won’t change, however.

Mortgage recasts are generally reserved for conventional loans backed by Fannie Mae and Freddie Mac. FHA and VA loans don’t qualify.

How to recast your mortgage

Let’s say you have a 30-year, fixed-rate mortgage on a $200,000 home with a 4.75% interest rate. You made a 20% down payment, putting your beginning loan balance at $160,000. In that scenario, the principal and interest portion of your monthly payment would be approximately $835.

If you were to pay a lump sum of $20,000 and bring your loan balance down to $140,000, your principal and interest payment would be lowered to approximately $730 — a monthly savings of more than $100. Plus, you would save more than $17,000 in interest over the life of your loan.

You must be current on your mortgage payments in order to request a recast. Additionally, lenders may require a minimum lump sum of $5,000 or $10,000, and there might be a recasting fee, perhaps $200 to $300. Check with your lender directly for more information about their mortgage recasting requirements.

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Recasting vs. refinance vs. modification

Recasting your mortgage isn’t the same as modifying your mortgage, nor is it similar to refinancing your mortgage. Here’s how they differ:

Recasting

  • A mortgage recasting requires you to pay a lump sum of money toward your mortgage principal.
  • Your loan goes through reamortization to adjust your monthly principal and interest payments.
  • Your loan term — whether it’s 15 or 30 years, for example — won’t change and neither will your mortgage interest rate.

Refinance

  • A mortgage refinance requires you to apply and qualify for a brand-new loan, meaning you must meet the mortgage company’s lending requirements.
  • You’ll receive a new interest rate, loan amount and loan term. These changes may result in a lower monthly payment, but you’ll pay more in interest if you extend your loan term.
  • You’ll pay additional closing costs. It’s sometimes possible to have those costs rolled into the loan amount, however.

Modification

  • A mortgage modification allows your lender to change the original terms of your mortgage without going through the refinancing process.
  • You could have your loan term extended, your interest rate lowered or your loan principal reduced.
  • There are no closing costs. Still, if your lender extends your loan term, the total interest you pay over the life of the loan will increase.

Alternatives to recasting your mortgage

Recasting a mortgage probably sounds like a great paydown strategy for homeowners who want to shed their debt more quickly, but not everyone has thousands of dollars set aside to lower their principal balance and monthly payment amount. So, what other options exist?

Biweekly payments

Paying your mortgage every two weeks is another method to chip away at your debt more quickly than submitting the standard 12 payments each year. When you make biweekly payments, that equates to a total of 26 payments annually, since there are 52 weeks in a year. Those 26 payments are the equivalent of 13 full monthly payments and will save you thousands of dollars in interest and allow you to pay off your mortgage a few years earlier.

Make extra payments whenever possible

Any time you have extra money that you don’t have necessary and specific use for, consider dedicating it to paying down your mortgage. You can request additional payments to go to the principal, so you’re doing yourself a favor by decreasing your years in repayment whenever you can.

What if you’re struggling to make payments?

If you’re struggling to make your monthly payment, recasting your mortgage might not be an option. But if you’re in this situation and want a lower payment, consider the options below.

Forbearance

If you need to pause your payments temporarily, contact your lender to find out whether you qualify for mortgage forbearance. With this option, your lender will reduce or suspend your monthly mortgage payments for an agreed-upon period.

Keep in mind that when your forbearance period ends, you’ll need to repay whatever amount was reduced or suspended. Your repayment options may include breaking up the amount owed and adding it to your monthly payments, making a one-time, lump-sum payment or getting a loan modification.

Mortgage modification

A mortgage modification is the process of changing the original terms of your loan to get you to a lower monthly payment amount. This can be accomplished in several ways, which include lowering your mortgage interest rate or reducing your outstanding loan principal balance.

Deed-in-lieu of foreclosure

For borrowers who are in default, not able to get current on their loan and ready to let go of their home, a deed-in-lieu of foreclosure — also known as a “mortgage release” — might be a viable option.

A mortgage release means you’re voluntarily transferring ownership of your home to your lender, and in exchange, you’re released from your remaining loan balance and monthly payments. You may qualify to stay in the home for up to a year and receive relocation assistance. This option also helps you avoid some of the more damaging effects of a foreclosure ruling.

The bottom line

If you have some cash stashed away that you don’t mind parting ways with, consider dedicating it to your mortgage principal for a recast and watch the monthly savings pile up.

There’s no need to wait until you’re struggling to find ways to better manage your mortgage, especially considering you have to maintain on-time payments to even be considered for a mortgage recasting. Reach out to your mortgage lender or servicer to find out how you can take advantage of a recast.

 

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