Mortgage Recasting: What You Need to Know

You have likely heard of restructuring as a strategy to diminish the sum of funds you pay each month for your mortgage. Recasting, on the other hand, is a procedure that you might not be familiar with. When you recast your mortgage, you pay a larger sum all at once. This brings the total sum still owed on your mortgage down, which results in a smaller settlement each month.

Even though the interest rate and the term of the loan won’t change as a result of the recasting procedure, one of the perks of mortgage recasting is that it is less complicated than the procedure of restructuring a mortgage. The procedure of mortgage recasting can begin with the steps that are outlined in this article.

What Exactly Is Mortgage Recasting?

When you pay down a large portion of the main balance on your mortgage all at once, this is known as recasting the loan. After that, your mortgage will be restructured using the new balance, which is likely to be cheaper. 

Since your principal has decreased, you should be able to diminish the sum of funds you pay back each month; nevertheless, your interest rate and loan term will remain the same.

The situation in which homeowners are most likely to recast their mortgage is when they have procured a new house but have not yet sold their previous residence. When the homeowner has sold their previous house and received the proceeds from the sale, they are then able to apply those funds toward the recasting of their new mortgage.

People who get a significant sum of funds and want to diminish the sum they have to pay for their mortgage can contemplate recasting their loan instead. For instance, a person who owns their home receives a sizable bequest or a bonus from their place of employment.

How Does a Mortgage Recasting Work?

When you restructure your mortgage, you make a one-time settlement that goes towards the principal sum of the loan you took out to procure your property. After then, the creditor who holds your mortgage will determine a new monthly installment for you to make based on the new, lower balance. The loan will have the same term as well as the same interest rate.

The recasting of a mortgage does incur an out-of-pocket expense in the guise of an operational fee; however, this cost is often only a handful of hundred bucks.

The fact that a mortgage recast does not involve the creation of a new loan is one of the most significant distinctions between a mortgage restructure and a mortgage recast. There is no application procedure that you have to go through, and the creditor will not investigate your credit or obtain an assessment of your home. 

Recasting and restructuring are both operations that incur fees; however, the fees for recasting are often less than those for restructuring. 

The act of recasting a mortgage typically results in a substantially higher overall cost than that of restructuring, despite the fact that the fees associated with recasting are typically lower. Your requirements and preferences will determine which option is most suitable for you.

How to Qualify for Mortgage Recasting

Mortgage recasting is not available from all creditors, and only certain types of mortgages can qualify.

A mortgage recast may be possible if you meet the following requirements:

• No government-backed loan will be given to you. Under present regulations, restructuring an FHA, USDA, or VA loan is not possible. Mortgages that are not qualified for recasting will require a loan restructure if you want to adjust your settlements.

• You need to at least get down the principal enough to qualify. A recast may be possible if you pay at least the minimum sum required by your creditor, which is normally around $10,000 but may be expressed as a percentage of the total principal. 

• There is an equity quota that must be fulfilled. There may be minimum equity requirements before you may apply for a recast on your loan. One more time, this can be a set dollar sum or a proportion of your principal.

• Lenders typically have a look at your settlement history before extending credit. Your ability to recast may be contingent upon your settlement history with the creditor.

It is important to remember that lending requirements might differ from one creditor to the next, so it is in your best interest to find out what you are eligible for.

Mortgage Recasting: Pros and Cons

Recasting your mortgage comes with both perks and downsides.

Pros

If you have the cash on hand, recasting can be a straightforward and relatively inexpensive solution to cut your monthly settlements, which gives it some appeal. If you do not have the cash on hand, recasting is not as appealing. 

Contemplating recasting your current mortgage could be desirable for a number of reasons, including the following:

• Paying everything off in one go will diminish the sum you have to pay each month.
• Avoid having to go through the procedure of reapplying for a loan.
• If you are currently perking from a low-interest rate, you should maintain that rate.

Cons

The decision to invest a significant sum of funds in equity constitutes the most significant negative impact on one’s finances brought on by recasting. You might wish to contemplate recasting for a number of reasons, including the following:

• Does not diminish the total duration of your home loan.
• Your interest rate will remain unchanged, which may work out to your detriment if you now have a higher rate.
• You have a greater proportion of your cash invested in equity.
• A fee is charged by the creditor, which is normally between one and several hundred dollars.

Some people might not benefit from getting their loans to recast in the current environment, which features mortgage rates that are currently at historically low levels and a robust market.

Mortgage Recasting vs. Refinancing: What’s the Difference?

Although both recasting and restructuring can aid borrowers to save funds, they work in quite different ways. As opposed to the hassle and paperwork involved in restructuring, recasting merely involves a one-time settlement in exchange for diminished monthly installments.

By recasting, the borrower keeps the same loan but modifies the resettlement terms. If you want a cheaper interest rate, contemplate restructuring instead of recasting. However, restructuring could backfire if your current interest rate is presently rather low, especially if existing rates are higher.

Restructuring, on the other hand, necessitates filling out a new loan application and paying any associated expenses. Your current mortgage would be repaid in full by the new loan, and you’d be on the hook for a new one at a different interest rate.

It’s common practice for debtors to do this when they want to lock in a lower interest rate or make the transition from a variable rate to a pre-asserted rate mortgage. Saving money by restructuring is unlikely if you already have a cheap interest rate on a standard mortgage.

Instead, if you have a cheap interest, pre-asserted rate mortgage and are trying to reduce your monthly payments, a recast may be a smart alternative for you.

How to Calculate Your Mortgage Recast

You may be able to get information from your creditor, but it’s not a terrible idea to figure out how to recast your mortgage on your own. Let’s take a look at how you can estimate it manually, even if using a mortgage recast calculator is the way to go about it in the easiest and most convenient way possible.

First, determine when you plan to make the one-time settlement, and then diminish the total sum that you owe on the loan. What you ought to do is check the date when you anticipate making the settlement. 

After that, you will be required to compute your monthly settlement for the remaining years of your loan based on the new sum, while maintaining the identical interest rate throughout the procedure.

Take, for instance, the case where you have a 30-year mortgage at a fixed rate with a balance of $200,000 and an interest rate of 4.99%. In this scenario, your regular settlement would come to $1,072.43 each month.

You make the decision to make a one-time settlement of $40,000, which takes the total sum owed on your account down to $160,000. If you recast your mortgage, your new monthly settlement will be somewhere about $870.81. This is a decrease of $201.62 in your settlement each month.

Make use of any of the available online amortization calculators to estimate how much funds you could save with a mortgage recast or restructure.

Is Mortgage Recasting a Good Idea?

If you have a substantial quantity of funds and want to diminish your mortgage installment without restructuring, recasting your mortgage may be the way to go. The following are examples of when it would be a good idea to recast your mortgage:

• After purchasing a new residence, you decided to sell your old one. Once you’ve sold your present house and gotten the funds from the sale, you can use those funds to recast your mortgage into a more manageable one.

• Eliminating mortgage insurance is a goal of yours. If you haven’t reached 20% equity in your house yet, you can use the lump sum to diminish your loan to 80% of the home’s value and stop paying private mortgage insurance (PMI). However, before canceling your PMI, your servicer may wish to confirm the current market worth of your home.

• As you near retirement, you’re looking for as little funds as possible to spend. Restructuring your mortgage could help you adjust your spending to match your new, lower retirement income.

• You might be making settlements on a mortgage, HELOC, home equity loan, or jumbo loan right now. Your ability to recast your mortgage will be severely limited if you have a loan insured by the FHA or the VA.

Alternatives to Mortgage Recasting

In the event that a mortgage recast is not feasible for any reason, you still have other opportunities to diminish the cost of your mortgage. Here are five examples:

1. Contemplate a mortgage restructure if a diminished interest rate is a priority. Because of this, it’s possible that the total sum of interest paid throughout the course of the loan might be diminished by tens of thousands of dollars.

2. Just one additional settlement should be made each year. You could end up saving thousands of dollars in interest settlements thanks to this strategy throughout the course of the loan.

3. Eliminate your need for a mortgage insurance policy. When applying for a conventional mortgage, if your down settlement was less than 20% of the total loan sum, you may have been required to incur private mortgage insurance (PMI). 
   
   In the event that you do not repay the loan as agreed, the creditor will be protected by insurance. Accelerating your mortgage settlements in order to meet the 20% PMI threshold is one way to avoid having to pay private mortgage insurance (PMI).

4. If you are having trouble paying your bills, contemplate modifying the terms of your mortgage. There is a possibility that you may be able to get a reduction in the interest rate or the principal sum of the loan, as well as an extension on the sum of time you have to pay it off.

5. Go beyond your budget. When you analyze the funds that your household spends, you might discover some savings that you can put toward making additional settlements on your mortgage.

Bottom Line

A mortgage recast can be a useful technique for obtaining a lower settlement on a monthly basis. It does not necessitate that you submit an application for a new loan, and the service charge is rather reasonable.

It is a simple strategy that allows you to diminish the overall cost of your loan by immediately lowering your monthly settlement while simultaneously contributing additional funds to the principal of the loan.

Despite this, a recast will not affect the remaining time on your loan or the interest rate. Restructuring your mortgage allows you the chance to migrate to terms that are more favorable to you.