Recast Mortgage: A Guide to Easing Your Mortgage Concerns

There are currently over 84 million active mortgage holders across the country, of which approximately 5.47 million are behind on their payments. If you are a mortgage holder, you must be wondering how to avoid adding to that number.

A mortgage recast appears here as a straightforward solution to make payments manageable and help you save more money. However, the process to apply for and secure one can be complicated without the knowledge to navigate this landscape.

Not all loans qualify, and not all lenders offer the option. Recasting your mortgage means you also need a suitable vendor to do it. Houzeo can help you find verified lenders that meet your needs, so why wait? Start saving now! 

What Is a Mortgage Recast?

Mortgage recasting reduces your outstanding loan balance after you pay a lump sum toward the principal. This leads to recalculated, lower monthly payments.

It’s important to note here that mortgage recasting does not erase your loan. It keeps the mortgage duration same as well, but makes it more manageable by reducing the original principal amount.

How Does a Mortgage Recast Work?

Once you have set aside a certain amount of money for your recast, it’s time to contact your lender. You will need to go through following steps: 

1. Loan Type: First, make sure your loan authority is not a government institution. Government-backed loans like FHA, VA, or USDA loans cannot be recast.
2. Payment: The lender will ask you for the lump sum you want to pay toward your mortgage principal. This amount is usually around at least $10,000, but it varies with lenders.
3. Calculate Principal: Then, subtract the lump sum payment from your current outstanding mortgage balance. For example, if your outstanding balance is $200,000 and you pay a $20,000 lump sum, your new principal balance will be $180,000.
4. Calculate Loan Term: Next, account for the remaining months in your original loan term. This term remains unchanged during recasting. For instance, if you have 240 months (20 years) left on a 30-year mortgage, you will still have 240 months after recasting.
5. Recast the Mortgage: The lender will finally recalculate your monthly payments based on the new principal balance, the remaining loan term, and the original interest rate. 

When dealing with your lender, carry relevant documents like proof of income, identification, and bank statements. They may also want to know your credit score, lending/borrowing history, and other details. 

Recasting also has an out-of-pocket cost. Your lender will charge you a fee to recast your mortgage, which varies from $150 to $500.

Do You Qualify for a Mortgage Recast?

Not all kinds of mortgages qualify for a recast, and not all lenders offer this option. Once you’re sure the mortgage qualifies and the lender offers a recast, you will need to meet some basic requirements. These establish your eligibility for a mortgage recast: 

Don’t Have a Government-Backed Loan

As mentioned above, mortgage recasting typically only applies to conventional loans. Government-backed loans have specific guidelines and restrictions that may not accommodate the recasting process. 

Satisfy Minimum Principal Reduction Standard

This is the minimum amount by which you must reduce the principal balance of a loan. It is usually expressed as a percentage of the original loan amount. For example, if the minimum principal reduction is 10% and your principal is $100,000, you must pay at least $10,000 to justify a recast.

This threshold varies widely among lenders based on the type of loan you have and their internal policies. To ensure you qualify, read the loan documents carefully and discuss them with your lender before applying. 

Meet the Minimum Equity Requirement

This refers to the ownership stake the borrower has in their property after clearing all outstanding debts and liens. If the bar is set at 20% and your home is valued at $200,000, you need at least $40,000 in equity.

A substantial stake in the property demonstrates your creditworthiness and ability to repay the loan. Keep updates on your house’s market value to maintain a record of your ownership stake. Lenders may have different thresholds based on credit score, loan-to-value ratio, and loan type.

» How Much Is My Home Equity: Know your Home Equity with Houzeo’s free home price estimator.

Have a Positive History for Lender Payments 

Your 12-month payment history should be clear and without fault, as a faulty history can make you ineligible for recast loans. The reason is simple: it lowers your credibility as a borrower, eroding lender trust. 

Calculating the Recast Mortgage

The mortgage calculation considers the principal, tenure, and interest in a standard scenario. Let’s say you have a principal of $300,000 for 20 years or 240 months at a rate of 4.5%. 

For this, the monthly mortgage payment would be around $1,900.  

You inherited $50,000 from a family member and decided to use it to recast your mortgage. 

Now, the principal is $250,000. With continued interest of 4.5%, the mortgage will be reduced to $1,550, saving you around $350 each month. 

This calculation uses the same formula as a regular mortgage:

Monthly Payment = 

         principal × interest (i) × (1+i)^months 

————————————————————————– 

                     (1+i)^months – 1

Mortgage Recasting: Advantages and Disadvantages

Mortgages, like most financial arrangements, are complex. So, is recasting worth the hassle?

Though the process has downsides, recasting is generally in the borrower’s best interests. 

• Lower Monthly Payments: Once a big sum is paid, the monthly payments drop to a more manageable amount. This is especially beneficial for homeowners during times of economic uncertainty, like layoffs, recession, or even global events like the COVID-19 pandemic.

• Low Fee: While refinancing typically involves closing costs, appraisal fees, and potentially higher interest rates, recasting tends to have lower fees. The primary cost of recasting is often a small fee charged by the lender, which is significantly lower than the fees involved in refinancing. 

• No Checks: Recasting does not involve home appraisals or other additional costs, saving you time and paperwork. Recasting simply adjusts the amortization schedule based on a lump sum payment. It streamlines the process and avoids the complexities of full mortgage applications.

However, there is a major disadvantage that you will need to consider. During mortgage recasting, the remaining loan term remains unchanged. 

If you initially took out a 30-year mortgage and have already paid it down for 5 years, recasting will leave you with 25 years remaining. This lengthens the duration of repayment unnecessarily.

Refinancing or Recasting: What to Choose? 

As discussed in the introduction to this blog, refinancing can offer more comprehensive changes to your mortgage terms than recasting. 

Parameter	Refinancing	Recasting
Purpose	Replace the current mortgage with a new one to adjust terms or access equity.	Lower monthly payments by reducing principal without changing terms or rates.
Change in Interest Rate	It can secure a lower interest rate, reducing the total interest paid.	The interest rate remains unchanged; it focuses on reducing the principal for lower payments.
Adjust Loan Term	Change loan term (e.g., switch from 30-year to 15-year mortgage).	The loan term remains unchanged.
Access Equity	Can access home equity through cash-out refinancing.	Does not provide direct access to home equity as cash.
Costs Involved	Involves closing costs, appraisal fees, and potential upfront fees.	Typically, it incurs just a small fee from the lender.
Suitability	Best for significant interest rate reduction, changing loan term, or accessing equity.	Ideal for lowering monthly payments without changing loan terms or rates.
Considerations	Consider long-term savings vs. upfront costs; beneficial if staying in the home long-term.	Ideal if you are satisfied with the current loan terms and have a lump sum for principal reduction.

Bottom Line

If you have a mortgage and some extra money, recasting can be an attractive option to reduce the amount you pay as monthly installments. This has its benefits, especially when you face financial instability and can no longer contribute as heavily to your mortgage. 

However, it’s crucial for you to know the terms of recasting before you choose to finalize one lender. We advise you to keep your tabs on the market and what different lenders offer. And as always, you can rely on Houzeo to help you find the best lenders nearby! 

Frequently Asked Questions

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