Mortgage Recasts Explained
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What Is a Mortgage Recast?
If your home mortgage terms include a mortgage recast option, you’ll benefit from lower monthly mortgage payments after your recast date. With a mortgage recast, you make a lump sum payment to pay down some of your loan balance.
Once you’ve completed this payment, your lender reconfigures the loan amortization schedule to calculate the remaining payments you must make on the mortgage. Since your loan balance is lower, your monthly mortgage payments are also lower.
The loan terms you agreed to when you originally financed your home should outline any mortgage recast options you’re eligible for. If your mortgage includes a recast, there’s usually a set loan recasting date. You must have made your lump-sum payment toward the loan balance by this date and the lender creates your new amortization schedule. Your updated loan balance and the remaining loan term are taken into consideration when your new monthly mortgage payments are calculated.
How Does Recasting a Mortgage Work?
A mortgage recast helps lower your monthly mortgage payments and the amount of interest you’ll pay over the life of the loan. However, you must have a good chunk of money available to pay down your mortgage before the new loan amortization schedule is created.
To recast your mortgage, you may also be responsible for recasting fees. These vary by lender but are usually a few hundred dollars on top of the lump sum you paid toward your loan balance. Your lender charges these fees because they must create the new amortization schedule for you and provide you with updated paperwork on your mortgage.
While your loan balance is lower since you made a large payment toward it, your loan term doesn’t change. The lender calculates your new payments based on your current loan term and your lower loan balance.
Types of Mortgages That May Be Recast
Before you assume you can recast your loan, review the type of loan you have and if it qualifies you for recasting. Federal Housing Administration (FHA) loans, Veterans Administration (VA) home loans, and U.S. Department of Agriculture (USDA) loans aren’t eligible for mortgage recasting. The types of loans that may allow for recasting include:
- Home equity.
- Home equity lines of credit (HELOC).
Your mortgage terms will outline whether your mortgage includes a recast or you can ask your lender about this option. Two types of mortgages that generally include recasting terms are negative amortization loans and option adjustable-rate mortgages (Option ARMs).
Negative Amortization Loans
Negative amortization loans allow you to schedule a payment that’s less than the interest charge on the loan. When this occurs, the interest is deferred and added to the loan balance. As these smaller payments are made, the loan balance increases over time instead of decreasing.
Since the loan balance continues to grow, there’s no way for the borrower to pay it off within the loan term. Therefore, the only way to pay off the mortgage is by recasting it. The borrower must provide a lump-sum payment to decrease the principal loan balance.
This recast may happen on a specific date that’s outlined in the mortgage. In some cases, recasting occurs when certain thresholds are met, such as a specific loan balance. The borrower must be prepared for this recasting by learning what could trigger it and paying attention to the loan balance.
Option Adjustable-Rate Mortgages (Option ARM)
Option ARMs are adjustable-rate mortgages that have similar characteristics to negative amortization loans. With an option ARM, the borrower has the option to make payments that include both principal and interest or to make payments that only address some of the interest charges.
This type of loan is attractive to buyers who may have unsteady financial situations. They can make full payments when their budgets allow or only pay interest if their income slows. If the borrower gets into the habit of only paying interest on the mortgage, their loan balance will continue to increase instead of decrease over time.
The interest rate that a borrower is responsible for with an option ARM changes with the market. These fluctuations may be helpful or detrimental to the borrower, so a mortgage recast may help lower monthly payments once a lump-sum payment is complete.
Mortgage Recasting Qualifications and Availability
If your mortgage doesn’t include a recast but you think you may benefit from paying down your loan balance, consider speaking with your lender about this option. Not all lenders offer mortgage recasts. Only most major banks offer recasting to borrowers, including the following:
Depending on your lender, you may also be required to meet additional eligibility guidelines in order to recast your mortgage. Some lenders require that you make a certain number of consecutive monthly payments before recasting.
Your lender may also have a minimum lump-sum payment you must make before you’re eligible to recast your mortgage. This is usually a set dollar amount or a percentage of your current loan balance.
Be sure this lump-sum payment, along with the fees associated with a mortgage recast, still allows you to save money over the life of the loan. You should also consider whether your current financial situation is stable enough to part with the lump sum in order to recast your mortgage. If you have a high debt-to-income ratio, no emergency fund, or not enough income to cover your expenses, consider holding onto your savings if possible.
Mortgage Recast vs. Refinancing
While both mortgage recasting and mortgage refinancing are designed to help borrowers save money, these financial strategies have their differences. With mortgage recasting, you keep your original loan but pay down the loan balance and receive a new loan amortization schedule. With refinancing, you apply for a completely new loan.
When deciding whether you should refinance your mortgage or recast it, consider the interest rate on your current loan. The main reason borrowers refinance their mortgages is to get a better interest rate, which makes their monthly payments lower. With a recast, you don’t get a new interest rate but your payments are lowered because you make a large payment against your loan balance.
If interest rates are higher than when you originally obtained your mortgage, refinancing won’t help lower your payments. In fact, if you refinance your mortgage to a higher interest rate, your payments will increase.
While refinancing your mortgage doesn’t negatively affect your credit score unless you do it frequently, not being able to make your monthly payments will have a negative impact. Whether you’re leaning towards refinancing or recasting, it’s important to speak with your lender about your options before deciding which one is best for you.
If you’re looking for a way to lower your monthly mortgage payments, mortgage recasting may be helpful. You must qualify with your lender to recast your mortgage and be prepared to pay a portion of your loan balance in one lump sum, along with recasting fees.
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