Could Recasting Your Mortgage Be a Route to Savings?

Have you considered refinancing your mortgage loan? Have you had a positive change in income? Would you like to make your mortgage even more affordable? If you answered yes to any of these questions, consider the option of recasting your mortgage. What is recasting? What do you need in order to recast your loan? And when might it not be the right option? Learn what you need to know.

What Is Recasting a Loan?

Recasting — not to be confused with refinancing — means that the lender recalculates the loan's monthly payment due to a lump sum being paid toward the existing loan. Consider a borrower who has 15 years remaining on a loan with a balance of $100,000 after a lump sum is paid. If they recast the loan and essentially turn it into a 15-year loan for $100,000, they can save hundreds of dollars every month.

With recasting, the loan's length generally remains the same. The way payments are calculated and amortized are adjusted to reflect the current state of the loan instead of what it looked like originally differs.

Why Recast a Loan?

So, why use this option instead of more traditional choices like refinancing? One of the primary differences is that refinancing involves taking out a new loan. You must shop around, qualify for a new loan, and do the requisite steps the new lender mandates. Because recasting is simply an adjustment to the existing loan, it can be fast and less expensive than refinancing. It also lets you avoid having to do a credit check.

Recasting also generally requires that the borrower contribute a lump sum toward loan payoff in order to trigger the recasting option. So this option is best for a borrower who can commit a significant amount of cash, free and clear, to the payoff of their mortgage. The minimum amount to recast varies by lender and loan type. It may be a dollar amount or it could be a percentage of the loan's outstanding balance.

Finally, some types of mortgage loans may require (scheduled or unscheduled) recasting as a matter of course. This often includes negative amortization loans and some adjustable-rate mortgages. The reason is to prevent negative interest from increasing the loan principal by too much — protecting both the borrower and the lender.

Why Not Recast the Loan?

Of course, as with any loan product, recasting isn't ideal for all situations. First, the lump sum requirement may not be within every borrower's ability. A homeowner may not want to use up all their liquid cash to recast an existing loan — even if they will get monthly payment relief over time. While every person's circumstances are different, it may not be a good idea to borrow the money, as this could lead to overleveraging the home.

In addition, you can only change a few features of the loan during recasting. You may, in fact, only be able to change the monthly payment. If you would like to shop for other options — such as a reduced payment term, lower interest rates, or a different lender — you may need to refinance the loan instead.

Where Can You Learn More?

Could recasting be a good choice for your mortgage? If you're in the right financial position and want to make your loan even more affordable, it just might be. Start by learning more about how this underutilized option works.

At Cornerstone Residential Mortgage, we can help. We provide a wide array of loan options for every client. Call today to get more answers to your recasting questions and start determining if this is the right path for you.