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How Mortgage recasting Calculate?
When you opt for mortgage recasting, you’ll submit a lump-sum payment towards your principal balance. Subsequently, your lender will utilize this updated balance to compute a revised, reduced monthly payment. Notably, the loan’s duration and interest rate remain unchanged. Mortgage recasting might be a feasible choice for individuals who receive a windfall, such as a work-related bonus or inheritance. Nonetheless, it’s important to note that mortgage recasting typically involves an administrative fee, usually amounting to several hundred dollars.
Each home loan lender establishes its own guidelines regarding recasting. To ascertain your options with your specific lender, it’s imperative to communicate with them directly. Generally, lenders necessitate a positive payment history from the borrower, and they may impose a minimum lump sum payment requirement. This minimum threshold can vary from $5,000 to $50,000 in some instances, or it may be represented as a percentage of your current loan balance.
The eligibility of different loan types for mortgage recasting.
- Conventional Loans: Generally eligible for recasting.
- High Balance Loans: Generally eligible for recasting.
- Jumbo Mortgages: Generally eligible for recasting.
- FHA Loans: Not eligible for recasting.
- VA Loans: Not eligible for recasting.
Home loan recasting is a relatively straightforward procedure that doesn’t mandate a credit check, home appraisal, or closing costs.
How Mortgage recasting operates:
Initial Mortgage Details example:
- Loan Amount: $300,000
- Interest Rate: 4%
- Loan Term: 30 years
- Monthly Payment (Principal + Interest): $1,432.25
Scenario: You receive two work bonuses totalling $40,000 and decide to use it to recast your home loan.
| Before Recasting | After Recasting | |
| Loan Amount | $300,000 | $260,000 |
| Remaining Loan Term | 30 years | 30 years |
| Interest Rate | 4% | 4% |
| Monthly Payment | $1,432.25 | $1,222.65 |
| Principal Paid | Varies | Varies |
| Interest Paid | Varies | Varies |
| Total Payments (Principal + Interest) | Varies | Varies |
Explanation:
- Before recasting, your monthly payment is $1,432.25, covering both principal and interest.
- After recasting, with the lump-sum payment of $40,000 applied to the principal, your new balance becomes $260,000.
- The remaining loan term and interest rate remain the same.
- Your new monthly payment decreases to $1,222.65, as the principal amount is recalculated based on the reduced balance.
Again, the exact breakdown of principal paid, interest paid, and total payments would depend on the specific terms of the mortgage and the exact timing of the recast.
Comparison between Mortgage Recasting and Refinancing:
| Comparison Factor | Mortgage Recasting | Mortgage Refinancing4 |
| Fees | Administrative fee typically a few hundred dollars | Closing costs that can total 2% to 5% of the loan amount |
| Eligibility | Depends on the lender; federally backed loans not eligible (e.g., FHA, USDA, VA) | Virtually all mortgage types; typically requires a credit score of 620+ for conventional loans |
| Interest Rate Change | No | May obtain a lower rate if market conditions allow; improved credit score may help |
| Loan Term Change | No | Can opt for shorter or longer loan term |
| Home Appraisal Requirement | No | Usually required |
| Process Simplicity | More straightforward; no credit check | More complex; involves credit check and loan approval process |
Mortgage recasting tends to be simpler and less costly compared to refinancing, as it doesn’t involve a credit check or significant paperwork. However, refinancing offers more flexibility in terms of adjusting interest rates, loan terms, and accessing home equity for various purposes.
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Disadvantage of Mortgage Recasting:
1.Eligibility Constraints:
Certain types of home loan, such as those backed by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA), may not qualify for recasting. Confirm with your lender whether your specific mortgage is eligible.
2.Interest Rate Remains Unchanged:
Unlike refinancing, home loan recasting does not modify your interest rate. While your monthly payments decrease, the interest rate remains constant. If you initially had a 30-year loan, the recast mortgage will retain the same term.
3.Ineligibility for Certain Loan Types:
FHA, VA, and USDA loans are ineligible for home loan recasting. If you have any of these loan types, you won’t be able to utilize this option. These government-backed loans have specific regulations that do not align with the recasting process.
4.Large Lump-Sum Payment Requirement:
Home loan recasting necessitates a lump-sum payment toward your loan balance. This payment can be substantial, particularly if you aim to significantly reduce your monthly payments. Not everyone possesses the financial capacity to make such a sizable upfront payment.
5.Administrative Fee:
During the home loan recasting process, some lenders impose an administrative fee. This fee typically ranges from $200 to $500. Although it’s smaller than the costs associated with refinancing, it’s still an additional expense to consider.1
6.No Early Loan Payoff:
Unlike home loan refinancing, recasting doesn’t permit you to pay off your loan early. While your monthly payments decrease, the loan term remains unchanged. If your objective is to become debt-free sooner, recasting may not be the most suitable strategy.
7.Tied-Up Cash:
Opting for home loan recasting involves making a lump-sum payment to reduce your home loan balance. However, this means that more of your cash becomes tied up in your home. Unlike other investments or liquid accounts, this money becomes less accessible in case of emergencies.
8.Missed Investment Opportunities:
By utilizing a lump-sum payment for recasting, you forfeit the opportunity to invest that cash elsewhere. For instance, you could have allocated it to your 401(k) or other retirement plans, potentially earning returns over time.2
9.Limited Lender Options:
Not all lenders provide mort-gage recasting. If your current lender doesn’t offer this option, you might need to explore alternative avenues or consider refinancing instead.Conventional, high balance, and jumbo mortgages are typically eligible, while FHA and VA loans are not.3
Bottom line
home loan recasting can lead to lower monthly payments, but it comes with limitations such as ineligibility for certain loan types, a requirement for a large lump-sum payment, and missed opportunities for early loan payoff and investments. Borrowers should weigh these factors carefully before opting for recasting.