Most people know about the mortgage refinance options they have, but are you aware of the possibility of a mortgage recast?
A mortgage recast re-amortizes your existing principal balance, potentially lowering the amount of interest you pay for the loan. Unlike the mortgage refinance, you keep the same loan and terms, the only difference is the principal balance.
In order to use a mortgage recast, you must significantly pay down your principal balance. You can do this with one lump sum payment or through the years with extra principal payments. The lender takes the new principal balance and ‘recasts’ it over the remaining term with the same interest rate you had.
Keep reading to learn the pros and cons of this process.
The Pros of a Mortgage Recast
You Won’t Pay Closing Costs
Recasting your mortgage doesn’t require the lender to underwrite your loan. The lender doesn’t even have to do any major work on it. Instead, the lender takes the current principal balance and recasts it over the remaining term. You use the same lender that you have currently. It’s worth asking if the lender charges fees for this service, but they won’t be anywhere near as high as the closing fees on a refinance.
You Won’t Have to Qualify
If you refinance your mortgage, you must go through the qualification process all over again. This includes checking your credit, debts, income, assets, and loan-to-value ratio. You may or may not qualify to refinance your loan.
If you recast your mortgage, you don’t have to go through any of this. You keep the loan with the same lender that qualified you for it in the first place. Recasting your mortgage gives you a lower mortgage payment, so there’s not much risk for the lender when recasting your mortgage. In fact, the lender comes out ahead if you paid a big chunk of the principal balance off already.
You Pay Less Interest
The largest benefit of the mortgage recast is the lower amount of interest you’ll pay. Recasting your mortgage lowers the principal balance that the lender figures the interest payments on. With the lower balance, you pay less interest each month as well as over the life of the loan. It’s different from just paying down your principal balance ahead of schedule. With a mortgage recast, the lender actually reduces your payments, minimizing how much interest you pay over the life of the loan.
The Cons of Mortgage Recast
You Keep the Same Term
Recasting your mortgage doesn’t lower the loan’s term. It uses up the term you have left. In other words, you won’t pay your mortgage off any faster. If you pay the minimum required payments, you will still pay the mortgage over the entire initial term. Of course, you have the option to make extra payments and pay the loan off early, but your amortized payments will pay your loan off in the original term.
You Need a Large Sum of Money
In order to qualify for a mortgage recast, you must be able to significantly pay down the mortgage balance. Each lender has different requirements regarding how much you must pay down. Some lenders require a lump sum payment, such as $10,000 or $20,000 while others allow incremental payments throughout the years towards the loan’s principal.
You Give up Your Liquidity
Once you pay the large sum of money upfront to pay the balance down, you lose the money’s liquidity. Once tied up in your home, you can’t get access to the funds unless you refinance the home with a cash-out refinance. While a cash-out refinance may be available, it will cost you money and could extend your loans’ term, depending on what you can afford.
A mortgage recast can offer many benefits if you are trying to limit the amount of interest you pay. Before you recast your mortgage, though, look at all of your options. Do you have an emergency fund that can cover expenses should your income stop? If not, putting your money into your home to get a mortgage recast may not be the best option. On the other hand, if you are financially secure and just want to limit how much your mortgage costs in the end, talk to your lender about the possibility of a mortgage recast.