When it comes to managing your mortgage, you might have heard of refinancing as a popular option to reduce monthly payments or pay off your loan faster. However, there’s another lesser-known strategy called mortgage recasting. Let’s dive into what mortgage recasting is, how it works when it makes sense to consider it, and when you might want to avoid it.
What is Mortgage Recasting?
Mortgage recasting is a form of prepaying your mortgage, it is a process where you make a lump-sum payment towards your mortgage principal, and your lender then recalculates your monthly payments based on the new, lower balance. Unlike refinancing, recasting does not involve taking out a new loan. Instead, it adjusts the terms of your existing mortgage.
How Does Mortgage Recasting Work?
- Lump-Sum Payment: You need to make a significant lump-sum payment towards your mortgage principal. The exact amount varies by lender, but it’s typically a few thousand dollars.
- Recalculation of Payments: After the lump-sum payment, your lender recalculates your monthly payments based on the new, lower principal balance. Your interest rate and loan term remain the same.
- Lower Monthly Payments: The result is a reduction in your monthly mortgage payments since you now owe less principal.
Benefits of Mortgage Recasting
- Lower Monthly Payments: By reducing your principal, your monthly payments decrease, freeing up cash flow for other expenses or savings.
- Cost-Effective: Recasting usually involves a minimal fee, often ranging from $150 to $500, compared to the higher costs associated with refinancing.
- Keep Your Existing Loan Terms: Your interest rate and loan term remain unchanged, which can be advantageous if you have a favorable rate.
- No Credit Check: Unlike refinancing, recasting does not require a credit check or a new loan approval process.
When Should You Recast Your Mortgage?
- Large Lump-Sum Availability: If you have access to a substantial amount of cash, such as from a bonus, inheritance, or savings, and you want to reduce your monthly obligations.
- Satisfied with Current Loan Terms: If you have a low-interest rate and don’t want to go through the hassle or expense of refinancing.
- Want to Lower Monthly Expenses: If you’re looking to reduce your monthly payments to improve cash flow for other investments or expenses.
When Not to Recast Your Mortgage
- No Lump-Sum Available: If you don’t have a significant amount of extra cash to apply towards the principal, recasting isn’t an option.
- High-Interest Rate: If your current mortgage rate is high, you might benefit more from refinancing to a lower rate rather than just reducing your principal.
- Short-Term Plans: If you plan to sell your home or pay off your mortgage soon, the benefits of recasting may not be worthwhile.
- Investment Opportunities: If you have better investment opportunities where your lump sum could yield higher returns compared to the interest saved on your mortgage, you might prefer to invest rather than recast.
Steps to Recast Your Mortgage
- Check with Your Lender: Not all loans are eligible for recasting, so verify with your lender if it’s an option for you.
- Understand the Costs: Ask about any fees associated with recasting.
- Prepare Your Lump-Sum Payment: Ensure you have the required funds available.
- Submit Your Request: Follow your lender’s process to make the lump-sum payment and request the recast.
- Enjoy Lower Payments: Once the lender processes your recast, enjoy the benefit of lower monthly payments.
Mortgage recasting can be a smart financial move for homeowners looking to reduce their monthly payments without the costs and hassle of refinancing. It’s particularly beneficial if you have a large lump sum available and are satisfied with your current loan terms. However, it’s not suitable for everyone, especially if your primary goal is to lower your interest rate or if you don’t have extra cash on hand. Always evaluate your financial situation and consult with your lender to determine if recasting is the right strategy for you.
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About the Author:
Babak Moghaddam graduated from University of Southern California in 1985. He entered the mortgage industry as a compliance auditor at the Bank of New York in 1986 and completed his masters in Business Administration two years later. After seventeen years in the traditional mortgage banking world Babak finally transformed this vision into his own practice in 2002 when he formed Charter Pacific Lending Corp, a mortgage company that has provided over $900 Million in residential real estate loans throughout Southern California. Babak and his team do things a little differently than other mortgage providers. They work as financial advisors, because they have come to realize that a mortgage is a very powerful financial tool. And just like any other financial tool, it should be managed as part of the overall financial management plan to reach every home owner’s long and short-term financial goals much faster. You can contact Babak for a free consultation and strategy session at (800) 322-1217 X103.