Housing can take the largest chunk of your monthly income; in which case you might consider ways to save in this area. Refinancing your home loan is one option for getting a lower mortgage rate and a cheaper payment. But this isn’t the only way to save money each month. Mortgage Recasting is an option too.
What is Mortgage Recasting?
Mortgage Recasting isn’t the same as a mortgage refinance, which replaces an existing mortgage loan with a new one. This new mortgage comes with a different term and a new rate.
Mortgage Recasting, on the other hand, involves making a lump sum payment toward your mortgage principal. Your lender will then re-amortize your mortgage at the lower balance, which reduces your mortgage payment. Therefore, you’re able to save money each month without refinancing.
Recasting, however, does not change your original mortgage rate or term. In other words, the process doesn’t shorten or lengthen your mortgage. If you have 15 years remaining on your loan term, you’ll continue to make payments for the next 15 years.
When Does Mortgage Recasting Make Sense?
Mortgage Recasting is sometimes an option when borrowers want a lower payment, yet they’re satisfied with their original term and rate. Perhaps their existing interest rate is considerably lower than current market rates.
A borrower might also consider Mortgage Recasting after receiving a windfall like an inheritance, bonus, or insurance payout.
Generally speaking, Mortgage Recasting is also cheaper than mortgage refinancing.
A mortgage lender might charge a low one-time fee for recasting (ex. $500), whereas closing costs associated with refinancing can be as much as 2% to 5% of the loan amount. Closing costs include items like the application fee, credit report fee, loan origination fee, and the appraisal.
Cons of Mortgage Recasting
Even though Mortgage Recasting saves money, it isn’t an option for everyone.
Some lenders don’t offer this provision, and unfortunately government loans like VA and FHA loans don’t qualify for recasting. Keep in mind, too, lenders often require a minimum principal reduction (ex. $5,000) before recasting.
Conventional and government mortgage programs do allow refinancing. Plus, refinancing can result in a new rate, a shorter or longer mortgage term, and you can even refinance with a different lender.
If you want a lower monthly payment, Mortgage Recasting is an alternative to refinancing. However, it’s only an option with non-government loans, and it doesn’t change your mortgage rate and term. You must also meet your lender’s minimum requirements.
To see if you’re eligible for Mortgage Recasting, contact the loan experts at FirstBank Mortgage.