Just when you think you’ve learned all there is about mortgages; someone asks you if you’ve ever considered recasting. What in the world is that, you wonder? Should you consider it? Is it something you need to do? And where can you find the answers for all of these questions?
In this blog post we’ll explain recasting, why someone might want to recast, and alternatives to recasting. Like most financial options, what works for you might not work for someone else. But it’s easier to determine your best path when you have all the information. So read on!
What Is Recasting
Recasting means the balance of a mortgage is re-amortized over the remaining term of the loan. Sounds confusing – but think of someone who’s paid a lump sum amount off their mortgage, in addition to their regular payment. If they pay down the balance and continue making their payment, the loan will pay off early. Or they might elect to recast their balance.
By recasting the balance, the loan will pay off on the date it was initially scheduled to pay off – and the monthly payment will decrease.
Not all lenders and servicers offer or allow, recasting. There’s a good chance you can if your loan is a Fannie Mae or Freddie Mac owned conforming loan. However, if you have an FHA or a VA loan – you won’t be able to recast your loan.
If you have a jumbo loan balance, make sure to check with the mortgage lender, or the servicer you make your payments to, to see if they offer to recast.
The one main requirement before you can recast a mortgage is that you pay down a Lump Sum on your mortgage. Most lenders will have a threshold of 20% of your original mortgage balance. However, it can’t be an accumulation of the regular principal reductions from your regular monthly payments. Making those reductions monthly keeps you on track to pay off the mortgage on schedule.
Some lenders do allow recasting even with less than 20% of the lumpsum payment towards the principal.
You’ll also likely pay a fee as part of the recast. The lender or servicer will tell you the amount when you contact them about recasting your mortgage. Make sure to contact them before, and not after, you pay down the mortgage balance! You won’t be able to get money back without going through a full cash-out refinance.
