As a homeowner, if you intend to save your money on your mortgage, mortgage recasting is considered a suitable option. This will help you lessen your monthly payment and the total cost of interest you pay. Making additional payments might be reasonable for individuals who don’t have cash flow issues, meaning that people have funds left over after settling monthly payments.
Mortgage recasting is a way of paying off your mortgage on time. You will pay a huge amount towards the balance when you recast your loan. Then, your lender will re-amortize the loan with a new and lower monthly payment and balance. Even if your loan would be recast, you can keep the same loan term and interest rate.
Additionally, not every form of mortgage can be recast in a reasonable situation. Generally, you cannot recast an FHA loan, VA loan, or USDA loan, since your lender might utilize the recasting option to adjust your loan if you are unable to pay. Also, your lender would need you to lower your balance by a certain amount to recast it. If not all lenders, most of them might mandate that keep timely payments.
How Does Mortgage Recasting Work
Mortgage recasting simply does not imply that you would pay off your mortgage on time. Your new reimbursement schedule suits the initial plan, but each monthly payment needs to be changed to present the updated balance. Additionally, you must make full loan payments to recast your loan.
Certain lenders may impose charges of several hundred dollars with a fixed amount to pay. If the lender does not mandate a minimum deduction, consider that a small down payment will be enough to support the recast. After closing part of your balance with that lump sum, your lender will re-amortize the loan, determine new monthly payments like principal and interest, and organize them on a new repayment plan.
Advantages of Mortgage Recasting
Mortgage recasting can have several advantages more than refinance, but if there isn’t a home sale or other source of immediate funds, a lump sum payment could be a huge hindrance.
No credit check
If you refinance a loan, your lender evaluates your credit report and changes your terms depending on your current creditworthiness. In other words, there’s usually no credit check with mortgage recasting.
Pay little interest
Throughout your loan, your total interest will go down if you lower your principal. In addition, this lowers the total amount you pay for your loan as a result.
Maintain your current interest rate
With mortgage recasting, it makes no difference what the existing mortgage rates are. Moreover, you will not lose your discounted rate even if the rates increase.
No closing costs
There are closing costs associated with loan refinancing. Furthermore, mortgage recasting could lead to a fee from your lender. However, it will typically be less than traditional closing costs.
The remaining term of your loan
You might have to extend the loan term when you refinance. In addition, the duration of your loan remains unchanged with a recast.
No delay in the application process
Many of the steps involved in your initial mortgage application are also necessary when refinancing a home. Additionally, a mortgage recast requires much less, which speeds up the process considerably.
Disadvantages of Mortgage Recasting
Mortgage recasting is a significant method to lower monthly payments for most individuals. However, your payment may not get lower as it would with a refinance, meaning that it’s not suitable for everyone. The following are some possible disadvantages of mortgage recasting:
No change in interest rate
If mortgage rates have increased since you last financed your loan, this is a benefit. However, mortgage recasting will prevent you from benefiting from a more appealing rate if rates are declining. Refinancing might be a better choice in this situation.
Not all lenders offer recasts
Your loan can be refinanced by any mortgage lender, but not all lenders and servicers will perform recasts. Furthermore, recasts are not usually advertised, so you will have to ask if it’s a possibility.
Making additional payments
You might lower your loan amount instead of a lump sum if the lender permits you to pay additional principal. Since you may not be lowering your monthly payments, you would reduce the term on a mortgage by months or even years. With an amortization calculator, you can compare the total interest you would pay with a recast over making additional monthly payments.
Mortgage Recasting Requirement
To recast your loan, your lender will need you to fulfill other requirements with a lump sum payment. Also, you should know the requirements as they may differ depending on the lender.
Lump sum
It’s important to emphasize that mortgage recasting is quite expensive. In addition, you must reduce your principal by a minimum amount, usually thousands of dollars to recast your loan.
Loan type
Mortgage recasting cannot be accessible for loans that are government-backed, like FHA, VA, and USDA loans. Also, traditional loans are convertible. Your lender may establish various rules if you have a different kind of loan, such as a jumbo loan.
Equity
Your lender might also need you to have a specific amount of equity in your house to recast. Equity is the amount of your house that you own outright. To find equity, deduct the outstanding amount on your mortgage from the current value of your house.
Payment records
Although in certain situations this may be as short as one or two payments, a record of timely mortgage payments is necessary. That’s beneficial if you’re attempting to refinance a loan for a recently acquired house.
How Often Should I Recast Mortgage
Generally, there are no limits on the number of times you recast your mortgage as it comes with a fee. You should consider this cost, which can run into the hundreds of dollars when deciding whether to recast. If your mortgage has already been recast, you might be able to reduce the principal balance of your mortgage early by using your additional savings.