Is There a Benefit to Recasting if I Continue to Pay Original Mortgage

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Of all the ways to reduce your monthly mortgage payment, recasting might be the simplest.

The catch? You've got to have a large sum of money on hand to put toward your mortgage balance. But if you've got the money, a mortgage recast could reduce your monthly payments and help you pay off your home faster.

Right now, we're in a unique situation where interest rates are low, and the real estate market is booming. "In a low-rate environment, refinancing usually seems like a good option," says Mike Tassone, co-founder of Own Up, a lender-comparison platform.

But if you don't want, or can't qualify for, a refinance, a mortgage recast could be a good alternative.

Here's how it works:

What Is Mortgage Recasting?

A mortgage recast is when you make a large payment toward the principal amount of your mortgage — and in turn, your lender recalculates any remaining payments based on the new, lower balance. Your loan amortization schedule dictates how much you pay monthly and how much interest you'll pay over the course of the loan; recasting your mortgage could make both of those numbers go down.

How Mortgage Recasting Works

How and when you can recast will depend on your lender and the exact terms of your home loan.

"Different lenders have different requirements for this option, but you're usually looking at a minimum [lump-sum payment] amount of at least $5,000," says Tassone. Once you make that payment, your mortgage is recalculated with the remaining balance over the remaining months in your loan.

The benefit of a recast is that you get a new amortization table based on where you are in your payment schedule. "It's as if you started the mortgage with that lower balance," says Tassone. The end result is a lower monthly payment. And you'll also pay less interest over the lifespan of your loan, which can result in major savings.

For example: If someone has a $200,000 mortgage at 4% interest rate (with a downpayment of 10%), their monthly payments would be around $1,066. Recasting with $10,000 down (and assuming a recasting fee of around $250) you could end up saving upward of $5,000 in interest and $55 per month for your mortgage payments.

So, if you've recently come into a large sum of money, or if you have a loan with a high interest rate, but you don't want to refinance, you might benefit from a mortgage recast.

Mortgage Recast vs. Mortgage Refinancing

Although they sound similar, mortgage recasting and mortgage refinancing are two completely different things. "A mortgage recast just affects the current loan that you're in," says Tassone. That means you'll still be with the same lender and you'll still have the same interest rate and loan terms.

However, when you refinance a mortgage, you're replacing your existing loan with a new one. "Refinancing essentially 'resets the clock' and it takes it back to a 30-year term in most cases," says Tassone.

Since you're sticking with the same loan, a mortgage recast is simpler than refinancing. And because of that, a recast will often come with fewer fees. "With a recast, there's not really an initial outlay of money except for a couple hundred dollars," says Joseph J. Zoppi, managing partner at Templar Real.

To compare, Zoppi says one of his clients recently refinanced and ended up paying almost $5,000 in application fees and mortgage points. A lot of research, time, and money goes into securing a mortgage in the first place. So when you consider the convenience of keeping the same mortgage and simply readjusting the monthly payments with a recast — it's easy to see the appeal.

Another benefit to a mortgage recast is that it doesn't involve a credit check. If your credit has gone down since you first bought your house, refinancing may not be in your favor.

"For people who have lost their job, [refinancing] can be difficult," says Dr. Richard Green, professor at the Price School of Public Policy and Marshall School of Business at the University of Southern California (USC), and director of the USC Lusk Center of Real Estate.

However, Green notes that if your situation has changed enough to drastically lower your credit, "you want to conserve cash — you wouldn't want to pay your loan off any faster." But if your credit has gone down for more minor reasons, a mortgage recast could still be an option for lowering your monthly payments.

Pro Tip

Before you spend money on a principal payment to recast your mortgage, consider if there's any higher-rate debt that you should focus on instead.

Mortgage Recasting Requirements and Availability

If you're considering a mortgage recast, know that not all mortgages are eligible for recasting. For example, FHA and VA loans won't qualify, says Zoppi. USDA loans also aren't eligible.

Every lender has requirements for recasting a mortgage, so it's important to do your research. "Your lender may also have restrictions on how many times you can recast your mortgage," says Tassone, "and the minimum principal payment required for a recast varies by lender."

Make sure to contact your lender before making a large payment to make sure your mortgage is eligible to be recast and to confirm the details.

When Does a Mortgage Recast Make Sense for You?

If you're happy with the terms of your current mortgage, have enough money to make a large, lump-sum payment, and want to make smaller monthly payments, a mortgage recast could make sense for you. Here are some scenarios when a mortgage recast might be a good idea:

1. When You Want to Save on Interest

If you have a mortgage with a high interest rate and don't want to refinance, recasting can help you pay less interest over the life of the loan, even with the same interest rate since you'll ultimately pay less interest over the course of the loan. To calculate how much interest you might save, you can use a mortgage recast calculator.

Keep in mind that in order to request a recast, you will need enough cash reserves to make a large, principal payment. This usually happens after a life event that leaves you with a substantial sum of money. For example, "somebody who has a job that tends to pay larger bonuses … you might see someone take that bonus and put some of it — or all of it — into their mortgage and then request a recast," says Tassone.

2. When You're About to Retire

Recasting can also be a popular option for people nearing retirement. "If you're retiring in five years but have seven years left on your mortgage, you may not want to have to worry about it once you lose your labor income," says Green. Whereas refinancing could extend the amount of years left on your mortgage, recasting could help lower your monthly payments within the same term.

The less time you have left, the bigger the payoff. "If you have only a couple years left, maybe five years, and you recast your mortgage," says Zoppi, "you could drive down your payments considerably."

3. When You're Purchasing a Second Home

Another popular time for a recast is after purchasing another home. Instead of making an offer contingent on selling your current house, you could get a second mortgage that allows you to make an offer without a contingency. Then, when you sell the previous house, you can use that money to make a principal payment on the new mortgage and recast it. "People are trading up, so this is something that could work really well," says Zoppi.

Are There Any Downsides to a Mortgage Recast?

The short answer is no — so long as you have the cash and your mortgage allows recasting. "There's more pluses than really any minuses," says Zoppi. "The biggest plus is really in terms of driving your monthly fees down … and the cash outlay is less."

However, Zoppi warns against counting on a recast in case you don't qualify — either because your lender won't allow it or you don't have the funds. So before you bank on a recast, you should look into your lender's requirements first.

Because every lender is different, it's important to look at your current mortgage terms or ask your lender if you can recast, how much it will cost, and what the minimum principal payment would be.

Another thing to consider: be sure you're putting your money toward its best use, says Tassone.  "If you have other debt with a higher interest rate than your mortgage, you should focus on paying that off before spending cash reserves on a recast," he says.

And with most financial decisions, knowledge is key. "Understand your financial position and where you are," says Zoppi. "Then you can go to your lender and request a recast."

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Source: https://time.com/nextadvisor/mortgages/refinance/what-is-mortgage-loan-recasting/

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