Recasting a mortgage can save you money from your cash payments and interests. Homeowners can save some dollars from the amount they pay per month over the mortgage and also the interest accrued when they understand how to recast a mortgage.
What is mortgage recasting?
A mortgage recasting, also known as loan recasting, is an approach to reducing your mortgage payments every month without receiving a new loan. The approach is easy and can help you save money over the period of sorting your mortgage loan. Recasting reduces your monthly payments and its interests over the loan life term without affecting the loan term and its interest rate.
Some of the key benefits of mortgage recasting include lowered interest rates provided over the life of the loan, reduced monthly payment, and if you have a low-interest rate already, they will not change.
How does mortgage recasting work?
Recasting means giving a metal object a different appearance by melting it down and creating a new shape from it. Mortgage recasting has a similar form as it means that your mortgage is recalculated based on your current debt.
You’re presumed to have paid your principal since initially acquiring the mortgage, while the new mortgage terms will be based on what you have left after the lump-sum payment. A small fee will be required to recast. New mortgage terms will be based on your balance after the lump-sum payment, which will effect the same remaining term.
What lenders request as upfront lump-sum pay varies, and if your lump-sum isn’t significantly large, your monthly payment is not going to change. Your loan repayment will be done with a fixed monthly payment just as before without any change over the period of the loan, except you have an adjustable mortgage rate.
Pros of mortgage recasting
- Mortgage recasting will decrease your debt-to-income ratio.
- In most cases, you’ll have reduced monthly payments.
- You do not need to qualify for a loan all over again.
- You can choose to retain your interest rate if you were opportune to get a good one while getting the loan initially.
Cons of mortgage recasting
- If you extend your loan for any reason, you might end up paying higher interest in total.
- You are likely to pay a particular amount.
- You may get stuck in an interest rate if you had a high one at the initial point of taking the loan.
- You’ll be required to pay a lump sum of cash that could affect your savings badly.
In many cases, lenders often require $5,000 or beyond to mortgage recasting. Thereafter, the main balance is amortized to cut down on the monthly payments. Recasting fees vary per lender, but they are not likely to go beyond a few hundred dollars.
And aside from the fact that recasting may result in reduced monthly payments, it will also give room for borrowers to pay less on interest over the period of the loan.
For instance, if you have a 30-year mortgage that bears a principal balance of $200,000 and an interest rate of 5%, you might end up paying $1,200 monthly. If your mortgage demands $50,000 as recasting cost, and a $250 recasting fee, you’ll have savings of about $35,000 from interest payments and $300 mortgage payment per month. The money used for the mortgage recast is not going to be available for other investment goals.
It is always important to know that recasting helps to cut down on your monthly payments and not reduce your mortgage term.
Qualifications and availability of Mortgage recasting
While recasting a mortgage may sound fascinating, be sure that your lender provides recasting, many of them do not. You’ll however get it from several of the big banks in the United States.
Another thing to know is that not all mortgages qualify for recasting. Loans like VA loans and FHA loans cannot be recast.
Things to Consider When Recasting
There are some details and information you’ll need to process a mortgage recasting. Inform your lender about it and get the required information about the process. These would include:
- How much is it?
Consider the cost when considering the period of time you’ll be having the loan. The fee may be moderately huge. And you might want to consider paying a larger amount if the situation is good.
- Find out if your lender permits mortgage recast
Not all lenders allow mortgage recasts. Be very sure, so you do not have to waste time.
- What will you be saving on interest?
You’ll likely be saving more if you make a lump-sum payment and not recast the loan. You’ll be having a reduced payment with recasting, after reducing the debts so they can be paid on the originally scheduled date. But you’ll have more money saved on interest with a faster loan settlement, especially if you consistently make the original payment after the lump-sum payment made to reduce the balance of the loan.
- What’s the minimum required lump-sum payment to qualify?
The common minimum required lump sum is about $5,000. You might need to wait to do a longer period of savings.
- What will your new payment be?
It is important to find out the possible difference you’ll get after making the lump-sum payment. The result may not be as much as you expect.
Mortgage recasting alternative – Refinancing
Finding how to recast a mortgage for lower payments and interest savings is great, but another alternative to consider is refinancing your loan.
The fees with mortgage recast and amortization but unlike refinancing a loan, recasting doesn’t necessarily start over. Also, when you recast, your interest rate will not change, but it may with loan refinancing.
Loan refinancing requires that you apply for a new loan and pay every fee linked to it, including appraisal and closing costs. The new loan would be used to sort your existing loan and provide you with a new mortgage as well as new interest rates.
Recasting is easier since it only requires a lump-sum of payment to reduce your monthly payments. Refinancing is generally okay if you are able to sort out the existing loan and start anew. It’s only important that you do not end up paying high interests as a result of extending the loan term. If you have a decent loan with extra cash at hand, you’ll find recasting a good decision.