What is a Recast?
A recast on a mortgage refers to a process where the borrower makes a large, one-time payment towards the principal balance of the mortgage, and the lender adjusts the monthly payments based on the remaining term of the loan.
Here’s how it typically works:
Large Payment: The borrower pays a significant amount of money towards the principal of the mortgage. This payment is usually much larger than a regular monthly payment.
Principal Reduction: The payment reduces the outstanding principal balance of the mortgage.
Adjustment of Monthly Payments: After the principal reduction, the lender recalculates the monthly payments based on the remaining balance of the mortgage and the remaining term. The goal is to lower the monthly payments while keeping the same interest rate and term of the loan.
Term Unchanged: The recast does not change the interest rate or the term of the mortgage; it only adjusts the monthly payments based on the reduced principal balance.
Recasting a mortgage can be beneficial for borrowers who come into a significant amount of money and want to reduce their monthly mortgage payments without refinancing. It's different from refinancing, which involves taking out a new loan with new terms to pay off the existing mortgage and has closing costs.
The loan servicer must agree to allow a recast. The cost ranges from $250 - $350, but be sure to check with your servicer as this varies.
There are also stipulations for how quickly you may be allowed to request a recast after taking on a new mortgage. You should expect that a minimum of two consecutive monthly payments will have to be made before the loan is eligible and the process may take 45-60 days to complete.
Considerations for Recasting:
1) Buying Before Selling Current Home - If you are buying a home prior to selling your current home you may not have the funds available that you would ultimately like to apply to the new mortgage to keep it lower and your payment lower. Once you have the proceeds from the sale, the recast allows you to apply the large lump sum, have your monthly payment adjusted accordingly, and keep your current interest rate. This is important if your interest rate is attractive relative to the current market.
2) Refinance vs. Recast - This depends on the interest rate market at the time you are considering. There are always costs associated with refinancing. The costs can be covered by rolling them into the new loan amount if you have enough equity, or paying a slightly higher interest rate to receive a lender credit to offset the costs. But the fact is that there are costs. If a refinance offers a significantly lower rate, regardless of how you address the closing costs, and that is more beneficial to you with interest savings based on how long you will keep the loan, then it may be the right option. If the market is during a period of rising rates, the recast would make more sense.
The bottom line recommendation is to review this with a mortgage professional to help you determine what is the best decision.
