“Recasting is far different from a refinance,” says Matt Weaver, vice president of Cross Country Mortgage in Boca Raton, Fla. “There’s typically little to no cost to recast your loan. Your interest rate doesn’t change, and your note due date doesn’t change. If your loan is a 30-year fixed-rate loan, it’s still a 30-year fixed-rate loan. The only things that change are your balance and your monthly payment.”
For example, if you have a $400,000 loan balance and pay $75,000 to reduce the principal, you’re recasting your loan to one with a $325,000 balance. The monthly payments with a 3.0 percent interest rate on a 30-year fixed-rate loan would drop from $1,686 to $1,370.
Weaver says that recasting is popular now because of the competitive housing market.
“A lot of people are choosing to a buy a home before selling their current home and need to make an offer without any contingencies,” says Weaver. “As long as they can qualify for a loan with higher monthly payments, they can plan to make a lower down payment and recast their loan with the proceeds from the sale of their home after they’ve purchased their new home.”
For example, Weaver says, many of his borrowers are moving to Florida from New York.
“If they buy a $600,000 house in Florida, they may want to make a down payment of $200,000 and borrow $400,000 at first,” says Weaver. “Then when their home in New York sells, they can take another $200,000 in profit from that sale and to pay down the balance and lower the payment.”
While recasting is an easier process than refinancing and doesn’t incur the closing costs that refinancing does, there are some drawbacks.
“While borrowers will have a lower monthly payment, they’ll save less in interest over the life of the loan than if they refinanced because recasting doesn’t shorten the original term of the loan,” says Dawn Ryan, a senior loan officer at Embrace Home Loans in Middletown, R.I. “It’s basically as if less money was borrowed. Recasting usually happens earlier in the mortgage term, although not exclusively. In most cases the borrower is selling another piece of real estate shortly after acquiring their mortgage.”
Most banks, lenders and loan servicers require a minimum amount to be paid on the principal for a recast, generally at least $20,000, but it varies, says Ryan. Weaver says some lenders require $50,000 or more for a recast. He says paying 20 percent or more of the loan balance for a recast is a good rule of thumb.
It’s essential to request a loan recast before paying down the balance. Otherwise, you will have reduced the loan balance without changing your monthly payments.
“If you plan to recast your loan soon after you buy a new home, make sure your lender commits to that upfront,” says Weaver. “It’s much easier to do a recast at least 90 days or more after your loan closes so that the loan servicer has time to start servicing your loan.”
The primary drawback of loan recasting is the requirement for a lump-sum payment.
“Everyone should think about whether they want to do something different with that capital other than reducing their loan balance,” says Weaver.
Typically, Weaver says, loan recasting is requested by people near retirement age who can access capital upfront without the sale of their home for their down payment. In addition, these borrowers often have substantial proceeds from the sale of a home they have owned for many years.
Recasting and refinancing aren’t the only ways borrowers can adjust their mortgage terms. You can also pay more toward your principal balance to shorten your loan term, build equity more quickly and pay less interest over the life of your loan.
“If a borrower makes one extra payment per year toward the principal of their 30-year mortgage, they will generally reduce the term by five years, saving thousands over the life of the loan,” says Ryan.