What is A Mortgage Recast and Why Do It?
Ever heard of a mortgage recast? Maybe that term sounds familiar… but do you really know what it is and when it’s beneficial for you to consider?
First off, let’s define what a recast is. Mortgage recasting is the process of unlocking the amortization schedule of a fixed rate mortgage, applying a lump sum payment towards your principal balance, and then re-setting the payment based on the new loan amount. In a typical fixed rate mortgage, when an additional lump sum payment is made towards principal (say, an extra $10,000 you received from Grandma), the term of the loan is shortened but the payment remains the same until the loan is paid off. The difference (and advantage) of a mortgage recast is that the payment re-calculates once a lump sum is applied towards the principal balance, reducing your monthly payment.
When would this be beneficial?
This might make sense if you receive a large amount of cash from someone or some event and want to use that money to reduce your loan amount AND your monthly payment. It’s also beneficial if you sell and close on your current home after the closing of your new property. For example, when you receive $50,000 in net proceeds after you’ve already bought and closed on your new home, you could then apply that (or a portion of that) amount to the mortgage on your new home, reducing your total monthly payment.
The great thing about a mortgage recast is that it’s very inexpensive (compared to refinancing your home). It’s about $250-300 per executed recast. A mortgage recast doesn’t require an appraisal (which costs you $500 if you are hoping to refinance in addition to other mortgage and title fees). Keep in mind — there is a timeline restriction. Typically, you must wait until the new loan has been on the books for a minimum of 90 days and you must maintain a perfect payment history. Also, not all mortgage lenders allow this process or even make their clients aware of this feature so make sure you ask the loan officer you’re working with.
Let’s look at an example of a 30 Year Fixed Rate Mortgage at 3.5% with a lump sum payment of $50,000:
Original Loan Amount = $250,000
Original Principal & Interest Payment = $1,122.61
New Loan Amount after $50,000 lump sum payment = $200,000
New Principle & Interest Payment = $898.09
This gives you a total monthly reduction of $224.52!
If you have any questions or would like more information about mortgage recasting, please don’t hesitate to contact the Parkinson Group!