Skip to content

What is A Mortgage Recast – And How Can it Help?

One of the few constants in life is change. The economic situation you were in when you purchased your home could very well be different now, due to an inheritance, a boost in income, or simply really smart money management. 

Or, perhaps you decided to purchase your new home before selling your prior one, and now you’ve sold the old house and released its equity. 

If you find yourself in a more advantageous position than before, you may consider a mortgage recast. It’s different (and easier) than refinancing, especially if interest rates have increased (you can preserve your existing one.)

Let’s take a closer look at everything you need to know about a mortgage recast — and how it can help pay off your loan faster and get your family closer to financial freedom. 

Recasting

Simply put, a mortgage recast is an agreement with your loan servicer to apply funds toward your loan principal, after which they update the total amount you owe, resulting in a lower monthly payment.

It’s sometimes known as “re-amortization.” But, ”mortgage recasting” is easier to say!

Because it’s not a new loan, you’ll keep the interest rate you had when you closed on your home. If rates are higher now, then it’s advantageous to do a mortgage recast than it is to refinance. 

Certain mortgages, such as government-sponsored ones insured by the Federal Housing Administration or the VA, aren’t eligible for recasting, unfortunately.

You’ll need to have a history of making your payments on time. Demonstrating your creditworthiness will always help you get a better deal on loans of any kind. And, in most cases there is a nominal administrative fee, however, the future savings on your mortgage loan interest will far outweigh them. 

Not every loan servicer offers mortgage recasting. The ones who do usually require a minimum payment of $5,000 toward the principal or a percentage of the remaining balance to start the process. 

What to Keep in Mind

Finding yourself with a large amount of cash in hand and applying it toward your mortgage can be a wise idea, as it will enable you to pay off your loan faster so you can fully own your home. Before inadvertently over-committing to the recast, make sure your emergency fund is very healthy and you don’t need that money for other large expenses that always arise when you’re a homeowner. 

The Benefits

A mortgage recast can be cheaper and easier than going through the whole refinancing procedure, while reducing your monthly out-of-pocket, and potentially eliminating some other costs.

Perhaps the biggest benefit is eliminating PMI or private mortgage insurance. If your down payment was less than 20% of the home’s purchase price, you likely had to purchase PMI. In most cases that PMI is charged in the form of a monthly fee attached to your mortgage. If your additional cash increases the equity in your home to more than 20%, you’re entitled to have the PMI removed by your loan servicer. In many cases, your loan servicer will remove that PMI automatically (in particular, if your loan balance falls below 78% of the home’s original purchase price.) As a bonus, while mortgage interest may be tax deductible, PMI is not. Your aim is to eliminate the less desirable of the two.

Pro-tip: PMI, as the name implies, is insurance, which means a reduction of risk for the lender.

In many cases, a buyer can get a lower interest rate by financing with PMI, than they can without. That interest rate does not change for the entire fixed period of a mortgage (30 years, in the case of a 30-year fixed mortgage), but the PMI can go away as soon as you hit the threshold. I’ve had clients put down slightly less than 20%, take advantage of the better rate, and then promptly (within 12 months) reduce their mortgage balance and eliminate PMI. In total, they’ve reduced their costs on both sides. 

As you’re just recalculating instead of underwriting a whole new loan, your interest rate won’t change. But you also don’t have to go through the hassle of providing the mountain of income verification and employment documentation like you did when you first decided to buy a home. 

Reducing your monthly debt burden will allow you to do things like put more money into your retirement accounts, invest in exciting new sustainable business ventures, or fatten up the college funds for your kids. 

If you’ve recently moved and closed on your new abode before selling your old place, you can apply the proceeds to re-amortize your current loan. Many lenders may require that you make payments in the original amount for a certain period of time (such as 90-120 days) before your mortgage can be eligible for recasting. 

Keep in mind that recasting doesn’t shorten the term of your loan, and it also reduces your overall liquidity. If you need to access that cash later, you’ll have to cash out some of your home’s equity, sell, or refinance — which means going through the closing process all over again and paying all those miscellaneous fees.

Get Professional Guidance

Having your mortgage loan recast could be ideal for lowering your mortgage payments and easing your monthly debt load. 

But this mechanism has its pros and cons, with the biggest disadvantage being that you have to commit a sizable chunk of your cash on hand to make it happen. In some cases, it will make more sense for you to refinance your loan instead. 

That’s why it makes sense to seek the advice of an experienced loan officer who can help you navigate the different options available and ensure you make the right decision. 

Big box and online lenders can’t always deliver individualized customer service or even offer the opportunity to recast your mortgage. That’s why I’m proud to be able to work with you to find a perfectly tailored solution for your current financial needs.

Ready to learn more about mortgage recasting and why it might be right for you? Just reach out and give me a call today!

Share:

Send Us A Message

Most Popular