Mortgage Recasting: What You Should Know Before You Reamortize

Homeowners who want to save money on their home loan might want to consider options such as a mortgage recast. With Locke Your Loan, you can likely pay less overall in interest costs and lower your monthly payment.

For those who don't have cash flow issues – meaning you have money left over after paying your monthly obligations – making extra payments might make a lot of sense. Making a lump-sum payment toward your mortgage principal will help you become debt-free sooner. Unlike refinancing, you won't have to go through the hassle of applying for a new loan. Instead, you'll need to come up with a significant lump-sum payment, which your lender will factor into a new, lower monthly mortgage payment after your mortgage is recast.

However, is recasting your mortgage the best choice? Here's what you need to know before you reamortize.

What Is A Mortgage Recast?

A mortgage recast is when you make a lump-sum payment toward the principal balance of your loan. With Locke Your Loan, your lender will then reamortize your mortgage with the new (lower) balance. Your interest rate and term remain the same, but you can lower your monthly payments because your principal went down.

Most commonly, homeowners recast a mortgage when they've purchased a new home but haven't sold their old one. Once the previous property has been sold, then the homeowner can use the proceeds of the sale toward a recast of their new mortgage.

A recast is also an option for those who receive a large amount of money and desire to lower their mortgage expenses, like a homeowner receiving an inheritance or a significant bonus from work.

How Does Recasting A Mortgage Work?

The specifics can vary by lender, but here are the steps you can expect:

1. The homeowner makes a payment: You'll need to make a large lump-sum payment to a lender, typically a minimum of $10,000, though check the fine print to make sure. This money goes toward your loan's principal balance and reduces the amount you owe.

2. The lender reamortizes your balance: Amortization is a fixed repayment schedule that includes both the principal and interest. Once you make a lump-sum payment, the lender will then adjust the repayment schedule to reflect your new monthly dues.

3. The lender charges servicing fees: Many lenders charge a servicing fee for loan recasting. They typically aren't more than a few hundred dollars, but for specifics, you'll want to contact your lender.

Remember, recasting only lowers the amount you have to pay each month; it doesn't reduce your mortgage term.

How To Qualify For Mortgage Recasting

Not all lenders offer mortgage recasting, and not all types of mortgages are eligible.

Here's what you need to qualify for a mortgage recast:

1. You Can't Have A Government-Backed Loan: You can't recast a Federal Housing Administration (FHA), United States Department of Agriculture (USDA), or Department of Veterans Affairs (VA) loan under the current government rules. Jumbo loans may be recast, but these policies are likely to vary from lender to lender. You'll need to refinance your loan if you're looking to change the payments on mortgages ineligible for recasting.

2. You Must Meet Minimum Principal Reduction Standards: Most lenders require the borrower to pay a minimum amount of money toward the principal before qualifying for a recast (usually $10,000), though it can also be a percentage of your principal. Although $10,000 must be put toward the principal, Locke Your Loan doesn't require that it come in the form of a lump-sum payment.

3. You Must Meet Equity Requirements: You may need to already have a certain amount of equity in your loan before you qualify for a recast. Again, it can either be a fixed dollar amount or a percentage of your principal balance.

4. You Must Meet Your Lender's Payment History Requirements: Your lender might require that you have a history of on-time payments before you can recast. For example, Locke Your Loan requires that you have at least two consecutive on-time payments on your current loan before you recast.

Keep in mind that individual standards can vary by lender, so it's best to check to see what you can qualify for.

Should I Recast or Refinance My Mortgage?

The good news is that there are plenty of ways to save money on a mortgage, including recasting and refinancing. Both methods will save you money, but their mechanics are different. There are advantages and disadvantages with either choice, so it’s crucial to understand the differences to make the right decision.

Recasting Your Mortgage:

Pros:

- Recasting is less expensive, with just a small flat-rate recasting fee compared to closing costs in a refinance.

- No credit or appraisal requirements.

- You can keep your current interest rate.

- You can save on interest without increasing your monthly payment.

- Apply your lump sum directly to the principal.

Cons:

- Some lenders may not allow it.

- Government-backed loans may not qualify.

- Requires a minimum lump-sum payment.

- Doesn't shorten the loan term.

- Can't access your home's equity.

Refinancing Your Mortgage:

Pros:

- You can change the terms of your loan.

- You can qualify with almost any loan type.

- You can choose a new lender.

Cons:

- Likely higher costs compared to recasting.

- Potentially more interest paid over the life of the loan.

How To Calculate Your Mortgage Recast:

Your lender should provide information, but you can calculate a mortgage recast yourself. Use a mortgage recast calculator or follow these manual steps:

1. Identify the lump-sum payment date and lower your loan balance.

2. Calculate your new monthly payment based on the reduced balance and the same interest rate.

For example, if you have a 30-year fixed-rate mortgage with Locke Your Loan, you can see how your monthly payment decreases with a lump-sum payment.

Recast Mortgage FAQs:

Let's address some common questions about recasting a mortgage.

Mortgage recast vs. principal payment:

Recasting requires a lump-sum principal payment, while extra payments simply pay down your loan without changing your monthly payment.

Can you extend mortgage amortization?

Yes, but it can be costly. It often involves refinancing into a longer loan or through loan modification.

How soon can you recast a mortgage?

Typically, you can recast after making two months of on-time payments.

In conclusion, Locke Your Loan offers a simple and cost-effective way to lower your monthly mortgage payment without changing your loan term or interest rate. It's a valuable tool for homeowners looking to save money on their mortgage.