What is a Mortgage Recast? How you can Lower Monthly Payments: In this episode of Retirement Daily, Bob Powell and Dana Anspach discuss Mortgage Recasts. Recasting a mortgage involves making a lump-sum payment toward your loan principal, which is then re-amortized by your lender at the same interest rate but with a lower monthly payment. Compared to refinancing, recasting avoids fees and a credit check while allowing you to keep your current rate. Learn about the potential of mortgage recast with insights from Dana of Sensible Money. Discover the definition, recommended scenarios and the advantages associated with mortgage recasting. A mortgage recast, also known as a mortgage re-amortization or loan recast, is a process that allows homeowners to reduce their monthly mortgage payments by making a large lump-sum payment towards their principal balance. Unlike a mortgage refinance, which involves taking out a new loan with different terms, a recast does not change the interest rate or the remaining term of the loan. Instead, it recalculates the monthly payments based on the reduced principal balance.
Here’s how a mortgage recast typically works:
- Large Principal Payment: The homeowner makes a substantial lump-sum payment towards the principal balance of their mortgage. This payment can come from various sources, such as an inheritance, bonus, sale of a property, or a large cash windfall.
- Request for Recast: After making the lump-sum payment, the homeowner contacts their mortgage servicer to request a recast of their loan. The servicer will typically require documentation of the payment and may charge a small fee for the recasting process.
- Recalculation of Payments: Once the recast is approved, the mortgage servicer recalculates the monthly payments based on the new, lower principal balance. The interest rate and remaining term of the loan remain unchanged. The result is a lower monthly payment amount, as the loan is spread out over the remaining term with the reduced principal balance.
- Impact on Loan Term: While the interest rate and remaining term of the loan remain the same after a recast, the amortization schedule is adjusted based on the new principal balance. This may result in a slightly shorter loan term, depending on the amount of the lump-sum payment and the remaining term of the loan.
Benefits of a mortgage recast may include:
- Lower Monthly Payments: By reducing the principal balance of the mortgage, homeowners can enjoy lower monthly mortgage payments, providing financial relief and improving cash flow.
- No Refinancing Costs: Unlike a mortgage refinance, which typically involves closing costs, fees, and potentially higher interest rates, a recast allows homeowners to lower their payments without incurring additional costs or changing the terms of their loan.
- Retention of Current Loan Terms: Homeowners can retain their existing interest rate and loan term, avoiding the need to reset the clock with a new loan and potentially saving money on interest over the long term.
It’s important to note that not all mortgage loans are eligible for recasting, and the specific requirements and procedures may vary depending on the lender and loan servicer. Homeowners considering a mortgage recast should contact their mortgage servicer to inquire about eligibility, fees, and the recasting process. Additionally, homeowners should carefully consider their financial situation and long-term goals before deciding whether a recast is the right option for them. You may be one of the people who have never heard the term mortgage recast, but it could be a helpful financial tool. Suppose you received an inheritance but it isn’t enough to pay off your whole mortgage. Is there a way for you to put this lump sum toward the mortgage and lower their payment without refinancing? Maybe, because mortgage recast is when they re-amortize the loan, your interest rate and remaining term of the loan stays the same. Still, the mortgage company alters the amortization schedule, applying the lump sum to the balance, and then adjusting the payment to reflect an amount that pays it off over the remaining mortgage term, using the same interest rate. They’re just taking those extra payments you’ve made, applying them to the balance, and then recasting that mortgage over the remaining term of the loan using the same interest rate and payment schedule.
This differs from refinancing. When you refinance you have a new loan at the then-current interest rates with additional fees. But with recast, you have the same mortgage you’ve always had. It’s just a lower remaining balance and they’re recasting the loan over that remaining time frame.
There are many advantages to a recast such as it allows you to keep your current interest rate, which is going to be an advantage if you have a currently low-interest rate. It doesn’t require a closing process—and the thousands of dollars that tend to go along with that—or restart the clock on your mortgage’s duration. For those with locked-in low mortgage rates, it can allow you to lower their payment (PMT) without losing the benefit of that lower rate. Remove pay private mortgage insurance (PMI) if you didn’t have the 20% down payment and therefore have to pay PMI on your loan. If you recast—to the point of having at least 20% paid—then you may have removed the extra cost of PMI. Lastly, there are no refinancing fees/closing costs – often a small processing fee of maybe $250, although it can vary from lender to lender perhaps in the $100 – $500 range. Dana Anspach recommends a recast when someone is buying and financing a new home before the old home sells. “In those situations, we’ve had people who were able to get a mortgage on their new house that they were buying, then sell their old house. And once they got that lump sum out of the prior property, they were able to apply it to the mortgage on the new property and then recast that mortgage to keep their payment lower. And so that has been a very successful use of the strategy,” said Anspach. Recast when an inheritance or other lump sum comes in (deferred comp payout) – when it’s not enough to pay it off, but enough that a recast would lower the payment and free up cash flow. Or perhaps a financial independence retire early (FIRE) movement person who has been making extra payments, and now wants to free up monthly cash flow – maybe they changed jobs or retired. Another case would be someone receiving an inheritance or a big deferred comp payout. If they’re working with a deferred comp plan and it was all set to pay out as a lump sum at retirement then they may have enough cash to dent in that remaining mortgage balance, but not enough to pay it off completely. They would use that recast again to pay down the principal and then have a much lower payment going forward on the remainder of the loan. The other situation would be where someone who was part of the FIRE movement. Many of those people are paying extra on their mortgage as they go along. They may have been trying to get it paid off early and perhaps there was a change of strategy or they lost a job and now they’re sitting here going, how do I lower my monthly outgoing expenses? That could be a reason to recast again if the mortgage allowed it. However, FHA/VA/USDA loans will not allow recast. Some companies will recast with large principal payments being made.
“Although we wish you could be guaranteed to recast your loan, you have to check with your lender and see if your particular mortgage allows it,” said Anspach. For example, some banks would recast at any time you paid 10k or more on the principal. Others may allow only one recast over the life of the loan and it often must be at least six months after the loan origination. Though this is just a brief overview of what a mortgage recast is, Anspach hopes this was useful information, “we wanted to just have a general overview of the topic, realizing that a lot of people have never even heard of recast and never considered this as part of their financial plan. It’s something to keep in mind.”
Watch the full video to answer the question: What is a Mortgage Recast? If you’d like to watch more videos on finStream TV featuring Dana Anspach, please click this link: https://www.finstream.tv/featured/dana-anspach/