Mortgage Recasting: What You Should Know Before You Reamortize

Homeowners who want to save money on their home loan have multiple options to consider. One is what’s known as a mortgage recast, which, unlike the more common mortgage refinance, doesn’t require you to go through the hassle of applying for a new loan. But is a mortgage recast the right choice for you? If you’re thinking of recasting your mortgage or you’re torn between recasting and refinancing, it’s important to keep a few items top of mind before deciding on how to proceed.

What Is A Mortgage Recast?

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

When Should You Consider Recasting Your Mortgage? 

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, the homeowner can put the sale proceeds toward a recast of their new mortgage.

A recast is also an option for those who receive a large amount of money – such as an inheritance or a large bonus from work – and desire to lower their mortgage expenses.

Mortgage Recast Vs. Principal Payment

Recasting a mortgage requires making a large payment toward your principal loan balance. However, you can make additional principal payments on your loan without recasting it. If this is the path you choose, you’ll put yourself ahead of schedule and have fewer mortgage payments until your mortgage is paid off. Your monthly payment will remain the same, though.

Paying ahead of schedule without reamortizing/recasting is like driving faster along your usual route to work. Reamortizing/recasting is like taking a different route that uses less fuel but gets you there at the same time you would arrive using your old route.

How Does Recasting A Mortgage Work?

The specifics can vary by lender, but here are the general steps you can expect when you recast your mortgage:

• The homeowner makes a payment. You’ll need to make a large lump-sum payment to a lender – typically, a minimum of $10,000 – but check the fine print to make sure. This money goes toward your loan’s principal balance and reduces the amount you owe.
• The lender reamortizes your balance. Amortization is a fixed repayment schedule that includes both the principal and interest. Once you make the lump-sum payment, the lender will adjust the repayment schedule to reflect your new monthly dues.
• The lender charges servicing fees. Many lenders charge a servicing fee for loan recasting. This fee typically isn’t more than a few hundred dollars, but you’ll want to contact your lender for specifics. Rocket Mortgage^® charges $250 for a mortgage recast.

How Soon Can You Recast A Mortgage?

If you’re thinking of recasting/reamortizing your mortgage, you’re likely in luck. You only need to wait 2 months (during which you’ll have made your payments as agreed) after establishing an initial amortization schedule to recast the loan.

How To Qualify For Mortgage Recasting

Not all lenders offer mortgage recasting and not all types of mortgages are mortgage recasting-eligible. There are a few facts you should know about qualifying 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 through Rocket Mortgage may be recast, but recasting policies vary among lenders.

You’ll need to refinance your loan if you’re looking to change the payments on a mortgage that’s 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 go toward the principal, Rocket Mortgage doesn’t require that it come in the form of a lump-sum payment.

3. You Must Satisfy Equity Requirements

You may need to already have a certain amount of equity in your loan before you’ll 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, Rocket Mortgage requires that you have at least two consecutive on-time payments on your current loan before recasting.

Should I Recast Or Refinance My Mortgage?

You have several options for saving money on a mortgage. These include recasting and refinancing. It’s crucial to understand the differences between recasting and refinancing so you can make the right decision for your situation and needs.

Recasting Your Mortgage

Recasting your mortgage comes with both advantages and disadvantages.

Pros

• Recasting is less expensive. Instead of paying closing costs like you would with a refinance, you typically just pay a small flat-rate recasting fee.
• There are no credit or appraisal requirements. You don’t need to meet credit score requirements to recast your loan. Plus, there’s no need to worry about waiting for an appraisal like you would for a refinance.
• You can keep your current interest rate. A recast can allow you to keep your interest rate, whereas with a refinance, you usually have to accept the current market rate.
• You can save on interest and lower your payment. A recast can be the perfect solution if you have a large amount of money to put toward your loan but aren’t sure how your income will change in the future. Recasting allows you to save on interest without taking on a higher monthly payment.
• You apply your lump sum directly to the principal. If your lender doesn’t allow you to apply money directly to the principal, ask if they offer recasting.

Cons

• Your lender may not allow it. Some lenders don’t let you apply extra payments to your loan principal – they’ll go toward the next month’s payment instead. Although this will get you ahead on your payments, it won’t save you money on interest.
• You may not qualify for a recast. Again, government loans such as those backed by the FHA and VA generally don’t qualify for recasting.
• You need to make a minimum payment amount. Lenders usually only consider a recast if you make a minimum lump-sum payment that’s a specific fixed amount or a percentage of your principal. Plus, you’ll need to pay a fee.
• You don’t shorten the repayment term of your loan. Your monthly payment will go down, but your term length remains the same.
• You can’t access your home’s equity. Your contributed cash will be tied up in your home equity, meaning you’ll need to refinance, or get a home equity loan or HELOC, if you need to access your home equity in the future.

Refinancing Your Mortgage

Like recasting, mortgage refinancing comes with benefits as well as downsides.

Pros

• You can change your loan. You have the option to change the conditions of your loan when you refinance. You can shorten or extend your term length, take a lower interest rate or even refinance to a new loan type.
• You can qualify with almost any loan type. You can refinance any type of mortgage loan. Refinancing may be your only option to change your monthly payment if you have a government-backed loan.
• You can choose a new lender. If you’re unsatisfied with your current lender, you can refinance your mortgage loan with a new one.

Cons

• You’ll likely pay more for the loan. A new loan usually costs more than a mortgage recast, as it includes origination fees, appraisal fees and other related closing costs.
• You’ll potentially pay more interest. You’re technically taking out a new loan when you refinance your mortgage. Usually, you’ll pay more in interest at the beginning of your loan repayment term, with more of your payment going toward the principal later on. Plus, if you refinance to a longer term, you could end up paying more in interest throughout the life of your loan.

How To Calculate Your Mortgage Recast

Your lender should be able to provide you the information you need, but it’s not a bad idea to calculate a mortgage recast yourself. The easiest solution is to use a mortgage recast calculator, but you can also calculate it manually.

First, look at the date when you intend on making the lump-sum payment to lower your loan balance. You’ll then need to calculate your monthly payment in the remaining years you have on your loan according to the new balance, using the same interest rate.

Mortgage Recast Example

For example, suppose you have a 30-year fixed-rate mortgage with a balance of $200,000 and a 4.99% interest rate. In this case, your monthly payment would be $1,072.43.

Now suppose you decide to pay a lump sum amount of $40,000, bringing down your balance to $160,000. If you recast, your monthly payment drops to $857.94 – lowering your payment by $214.49 each month.

Before deciding to pursue a mortgage recast, you’ll want to see how much you can save by making an extra principal-only payment on your fixed-rate or fully amortized loan.

Can You Extend Mortgage Amortization?

It’s possible to extend mortgage amortization, but it can be costly and will generally require loan modification or refinancing. Through refinancing, you could reamortize a 15-year mortgage into a 30-year mortgage. However, if your mortgage comes with prepayment penalties, you’ll likely have to pay them.

Refinancing pays off the original mortgage and triggers those penalties, even though it may seem like you’re merely extending the mortgage.

Through loan modification, you can extend a 30-year mortgage – often an attractive option for those struggling to make their mortgage payments. If you’re considering this possibility, speak with your lender about whether it will result in additional interest.

The Bottom Line: A Mortgage Recast Can Help You Save Each Month

A mortgage recast is beneficial if you wish to secure a lower monthly mortgage payment. It doesn’t require applying for a new loan, and the service fee is relatively low. It’s also a straightforward way to put extra cash toward your principal and enjoy an immediately reduced payment for the rest of your loan repayment term.

Still, a recast won’t change your repayment term length or interest rate. It’s possible to change those to your advantage with a refinance, though. If you’re looking to make more significant adjustments to the conditions of your loan, start an application for a refinance today with the Home Loan Experts at Rocket Mortgage.