Mortgage Recast

A mortgage recast, also known as a mortgage re-amortization, is a process where a borrower pays a large sum towards the principal balance of their mortgage, and the lender recalculates the remaining balance into a new amortization schedule. The result is a lower monthly payment while keeping the original loan term intact. This financial maneuver is an alternative to refinancing and can be advantageous for borrowers who come into a significant amount of money, such as through a bonus, inheritance, or the sale of an asset.

How Mortgage Recast Works

When a borrower decides to recast their mortgage, they contact their mortgage servicer to request the process. A substantial lump-sum payment is made towards the principal balance of their loan. The servicer then recalculates the remaining loan balance over the remaining term, leading to reduced monthly payments. Unlike refinancing, a recast does not require a new loan application, appraisal, or closing costs, which often makes it a simpler and more cost-effective option.

For instance, if a borrower has a mortgage with a principal balance of $250,000 at 4% interest with 20 years remaining and decides to recast by making a $50,000 lump sum payment, the lender recalculates the loan. The new principal balance of $200,000 spread over the remaining 20 years will have significantly lower monthly payments due to the reduction in the principal amount.

Benefits of Mortgage Recast

Lower Monthly Payments

One of the primary benefits of a mortgage recast is the reduction in monthly payments. By making a lump-sum payment towards the principal, the borrower reduces the amount of money owed, which when re-amortized over the remaining term, leads to smaller payments. This can improve cash flow for the borrower, making it more manageable to meet monthly obligations.

Lower Interest Cost

Since the principal balance is reduced, the amount on which interest is calculated also decreases. Over time, this can result in significant savings on interest costs. However, it is important to note that this is different from refinancing to a lower interest rate, as the rate in a recast remains the same.

No Need for Refinancing

Recasting a mortgage does not involve many of the steps required in refinancing, such as application processes, appraisals, and closing costs. This makes the process quick, straightforward, and less expensive compared to refinancing options.

Requirements and Eligibility

Not all loans or lenders offer the option to recast a mortgage. Borrowers must verify if their loan is eligible for recasting by contacting their mortgage servicer. Conventional conforming loans usually present this option, but FHA, VA, and USDA loans do not typically allow for mortgage recasting.

The amount of the lump-sum payment required for a recast varies depending on the lender. Some lenders may require a minimum amount, frequently around $5,000 to $10,000, to be eligible for recasting. Furthermore, the servicer may charge a fee for processing the mortgage recast, which can range from $150 to $500.

Mortgage Recast vs. Refinancing

Differences

While both mortgage recasting and refinancing are strategies to manage mortgage payments, they differ significantly in terms of process and outcomes.

Recasting:

• Principal Reduction: Involves making a significant lump-sum payment toward the principal.
• Interest Rate: The original interest rate remains unchanged.
• Cost: Generally incurs a nominal fee.
• Eligibility: Not available for all types of loans (e.g., not for FHA, VA, USDA loans).

Refinancing:

• Principal Structure: May involve changing the loan structure entirely.
• Interest Rate: Can result in a lower interest rate if market conditions are favorable.
• Cost: Involves significant costs such as appraisal fees, origination fees, and closing costs.
• Eligibility: Open to all types of loans but dependent on creditworthiness and other factors.

When to Choose Which

Borrowers should consider their financial situation, current market conditions, and long-term goals when choosing between a mortgage recast and refinancing.

• Recasting may be more suitable for borrowers who have a significant lump sum to reduce their principal and wish to lower their monthly payments without altering their interest rate or incurring substantial costs.
• Refinancing may be a better option for borrowers looking to reduce their interest rate, change the loan term, or switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.

Scenario Examples

Scenario 1: Inheritance

Suppose a borrower with a remaining mortgage balance of $300,000 receives an inheritance of $75,000. The borrower decides to use the inheritance to make a lump-sum payment towards the mortgage. After the recast, the new principal balance is $225,000, and the monthly payments are recalculated, resulting in lower monthly payments.

Scenario 2: Bonus from Work

Consider a borrower with an original mortgage balance of $400,000. The borrower receives an annual bonus of $50,000. By using this bonus to recast the mortgage, the borrower can reduce their monthly payments significantly while retaining the same interest rate and loan term.

Steps to Mortgage Recast

1. Review Loan Agreement: Ensure that recasting is allowed by reviewing the loan agreement or contacting the mortgage servicer.
2. Gather Required Documentation: Prepare necessary documents such as loan statements and proof of funds for the lump-sum payment.
3. Request Recast: Contact the mortgage servicer to formally request a recast and inquire about any fees involved.
4. Make Lump-Sum Payment: Provide the lump-sum payment towards the principal balance.
5. Recalculation: The mortgage servicer recalculates the monthly payments based on the new principal balance.
6. Confirmation: Receive confirmation of the new monthly payment amount and updated amortization schedule from the mortgage servicer.

Financial Impact

Positive Impact

• Increased Equity: A recast mortgage increases home equity, as the principal balance is reduced.
• Improved Cash Flow: Lower monthly payments ease financial pressure and provide more disposable income.

Neutral/Negative Impact

• Interest Rate Remains the Same: Borrowers do not benefit from potentially lower market interest rates available through refinancing.
• Opportunity Cost: Utilizing a significant amount of funds for the lump-sum payment may result in less money available for other investments or emergencies.

Conclusion

Mortgage recasting is a valuable tool for borrowers looking to reduce their monthly mortgage payments without going through the more complex process of refinancing. By understanding the eligibility requirements, potential benefits, and comparing alternatives, borrowers can make informed decisions that align with their financial goals. To explore the possibility of recasting or to initiate the process, borrowers can reach out to their mortgage servicer or financial advisor for guidance.

For more information about mortgage recasting, many banks and financial institutions provide resources and support. Wells Fargo and Bank of America are examples of institutions that offer insights into mortgage recasting for their customers.