What is a mortgage recast and is it right for you?

In some circumstances, property owners may wish to restructure a mortgage loan payment schedule. This can happen for many reasons, such as a gift of equity, lump sum payment, financial windfall, or other reason. In these circumstances, a recast may be beneficial.

What is a mortgage recast?

Mortgage recasting is a process that allows homeowners to make a lump-sum payment towards their mortgage principal, which, in turn, leads to a reduction in their monthly mortgage payments that was not originally foreseen at the time the mortgage was originated. Importantly, the interest rate, loan term, and overall loan agreement remain unchanged during the recasting process.

When is mortgage recasting helpful?

Mortgage recasting can be an incredibly valuable tool for homeowners in specific situations. Here are some scenarios where mortgage recasting can be especially helpful:

  1. Windfall: If you come into a substantial sum of money, such as an inheritance, bonus, or any other financial windfall, using part of that money to recast your mortgage can significantly reduce your monthly financial burden.
  2. Lower Monthly Payments: If want to reduce your monthly mortgage payments without the complexities of refinancing, mortgage recasting can be a simpler and more cost-effective solution.
  3. Loan Amortization: Mortgage recasting is particularly beneficial when you want to maintain your current loan’s amortization schedule. This means you can keep the same loan term and interest rate while adjusting your monthly payments.
  4. Investment Opportunities: If you believe you can earn a higher return on an investment by using a lump sum of money rather than paying it towards your mortgage, mortgage recasting can be a wise choice.

Qualifying for Mortgage Recasting

Each lender typically has it’s own specific requirements for borrowers to be eligible for a mortgage recast. Some common criteria includes: a conventional (fixed-rate) mortgage, a minimum amount of lump-sum payment, current status of loan (no defaults), and the amount of time since loan origination.

The type and use of the property also matters. Commercial property mortgages are not recast as often as residential properties.

Common Steps in the Mortgage Recasting Process

Mortgage recasting is a relatively straightforward process that involves a few key steps:

  1. Contact Your Lender: Begin by reaching out to your lender to express your interest in mortgage recasting. They will provide you with the necessary information and forms to initiate the process.
  2. Lump Sum Payment: Prepare the lump sum payment that you intend to use for the recast. This payment should be made directly to the lender and should be substantial enough to meet their minimum requirements.
  3. Complete Documentation: Fill out any required documentation provided by your lender. This may include forms to confirm your financial situation, your intention to recast, and the lump sum amount.
  4. New Amortization Schedule: Once approved, your lender will recalculate your mortgage payments based on the reduced principal amount. You’ll receive a new amortization schedule that reflects your lower monthly payments.

How is a mortgage recast different than refinancing?

Mortgage recasting and refinancing are two different strategies for modifying your mortgage terms. A recast continues the original loan, while a refinance is effectively replacing your prior mortgage with new terms. When interest rates have increased substantially since the loan was originated, a refinance would mean a larger amount of payment goes to interest instead of the loan principal – benefitting the lender. When interest rates have decreased materially since the loan was originated, a refinance would mean the opposite – benefitting the borrower.

The choice between recasting and refinancing depends on your specific financial goals and the changes you want to make to your mortgage. Recasting is ideal if you wish to maintain your current loan terms and simply reduce your monthly payments, whereas refinancing is better suited for those looking to change their interest rate, loan term, or access equity in their home.

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