What is a Mortgage Recast?

Minneapolis, MN: Here in Minnesota where I am based, when you hear ‘recast’, you might think about casting a line for a big walleye, but actually, a mortgage recast is a little know tool that can allow you to potentially get a lower monthly mortgage payment without the need to actually refinance your current home loan.

As a way to save money on interest over time, smart people know that paying as little as one extra payment a year, starting at the beginning of your loan, reduce a 30-year mortgage by six or 7-years. But whether you add a little to each monthly payment, or pay a large one-time lump sum, your required monthly payment amount always stays the same.

But, if you have a substantial amount of money you’d like to apply to your mortgage, typically $10,000 or more, you may also have the option to lower your monthly payment today versus keeping the same payment today, but eventually paying the loan off early.

This is known as mortgage recast.

A recast takes your remaining loan balance after a large additional payment, then spreads out the new balance over the remaining term of your loan, which would reduce your monthly payment today.

recast /rē-kăst′/ – transitive verb:  To mold again.

Here are a few common scenarios where we see homeowners have large sums of money to throw at their existing mortgage are:

• Sold a home
• Life insurance beneficiary
• Divorce buyout
• Won the lottery!

A very common example is someone who bought a new home prior to selling your existing home. A lot of people do that because it is easier to move into the new home, then fix up the home for resale later.

Let’s assume you took out a new $400,000 mortgage at 6.00%. The principal and interest payment is $2,398.

One year later, you finally seller your old home, and profit $50,000. You’d like to apply that $50,000 towards the new loan. If you just add the $50,000 as principal loan reduction, your payment stays the same, but you knock a bunch of years off the end of your loan, which is very cool.

But, if you did a mortgage recast with the same $50,000 after one year, your payment would drop to $2124 a month, or $274 a month cheaper TODAY.

A recast option isn’t for everyone.

Depending on your long-term and short-term financial goals, and current market conditions, other options may be better. For example, if current mortgage rates are higher than what you have now, recasting is a good option. If current mortgage rates are lower than what you have now, a regular refinance loan is probably smarter.

A recast also isn’t free. Generally expect to pay a one time fee of $300 – $500. A recast is also not a one time option. You can do as often as you want.

Finally, not all loans qualify for a recast. They are only available on Fannie Mae and Freddie Mac backed conventional loans (your plain vanilla loan), and some jumbo and portfolio loans. Recasting is NOT available if you have a government backed loan, like and FHA loan or a VA home loan.

Whether a little extra each month, or a one-time substantial recast payment, paying extra towards principal reduction can save you a lot of money in interest over time.

We can also help you run the numbers of the effects  recasting your mortgage, and  running our mortgage recasting calculator, versus just making a principal reduction payment, or making a recast payment, so feel free to reach out anytime.