Definition
A mortgage recast is a financial strategy that involves paying a large, lump-sum amount towards the principal balance of a mortgage, which then leads to a lowering of the monthly payments. The reduction comes about because the remaining principal is recalculated or “recasted” over the remaining term of the loan. Recasting, however, doesn’t change the interest rate or the term of the mortgage.
Key Takeaways
- Mortgage recast refers to the process of reducing your monthly loan payments by making a substantial payment towards the loan and then having the interest recalculated based on the lower balance. This subsequently decreases the monthly charges.
- Unlike refinancing, mortgage recasting does not change the rate of interest or the term of the loan but simply adjusts the amortization schedule according to the new balance. Therefore, it’s often cheaper and faster than refinancing as it requires minimal credit checks and paperwork.
- Not all loan types or lenders offer the option to recast a mortgage. Typically, only conforming loans backed by Fannie Mae or Freddie Mac are recastable. Before deciding on a recast, it’s essential to discuss the concept with the lender, understand the fees involved, and assess its impact on your overall financial plan.
Importance
Mortgage recast is a vital financial term as it refers to a strategy that homeowners can use to manage their mortgage obligations more effectively and potentially save on interest costs.
Specifically, it relates to the re-amortization of the outstanding balance of a mortgage over the remaining term at a potentially lower interest rate or reduced monthly payments.
This provision is significant because it allows consumers the flexibility to make large, lump-sum payments towards the principal of their mortgage and then have their monthly payments recalculated, or “recast”, based on the new remaining balance.
Therefore, mortgage recast can serve as a valuable tool for homeowners seeking to lower their monthly payments, manage their budgets more efficiently, or pay off their mortgage early.
Explanation
The purpose of a mortgage recast is fundamentally to reduce monthly mortgage payments, making it a financial strategy often used when homeowners come into a lump sum of money. By making a substantial payment on the principal balance of the mortgage, lenders will then recalculate the monthly payment based on the new, lower balance.
This recasting process essentially spreads the remaining balance out over the existing term of the loan, resulting in lower monthly payments. This can provide valuable financial relief, especially in circumstances where income may have decreased or other expenses increased.
Mortgage recasting is broadly used by homeowners who wish to maintain the same loan term but reduce their monthly expenditure. Unlike refinancing, where you replace your current mortgage with a new one (often extending the term) to achieve lower payments, a recast allows you to keep your original loan and term, without having to go through the full loan approval process again.
In essence, recasting offers a simpler and typically less expensive alternative to refinancing for those who have the ability to make a significant lump-sum payment. It is, therefore, a suitable strategy for cash influx situations such as inheritance, a large bonus, or selling another property.
Examples of Mortgage Recast
Case of Home Refinancing: John purchased a home with a 30-year term mortgage. However, after 5 years, he gets a large inheritance from a deceased relative. He decided to use some of this money to recast his mortgage. This means he pays down a significant portion of his principal and his lender then re-amortizes, or recasts, his loan based on the new, lower balance. As a result, his monthly payment is significantly lower, making it more budget-friendly.
Lowering Payments After Extraneous Expenses: Susan and Mark have had a mortgage for about 10 years. However, their expenses surge as their children start to attend university. To lower their monthly expenses, they pay a lump sum to their principal balance and request a mortgage recast from their lender. Consequently, they are able to lower their monthly mortgage payments, making it easier to manage their increased educational expenses.
Adjustments Following a Windfall: David won a significant amount of money from a lottery. Although he was already comfortable handling his monthly mortgage payments, he decided to use his windfall to secure a better financial future. He paid a large portion of his mortgage principal and asked his bank for a mortgage recast. His lender agreed and re-amortized his mortgage payments based on this new, lower balance. Consequently, David’s monthly mortgage payments decreased, providing him with a chance to use his extra funds elsewhere in boosting his financial stability.
Frequently Asked Questions about Mortgage Recast
What is Mortgage Recast?
A mortgage recast is a strategy that homeowners use to reduce their monthly mortgage payments by applying a large lump sum towards their principal and having their mortgage re-amortized based on the lower balance.
How does Mortgage Recast work?
After making a large sum payment (sometimes called “lump sum”), the lender recalculates the monthly payments based on the reduced outstanding balance. This strategy allows the homeowner to return to their original loan term with less monthly payments, while keeping the interest rate the same.
What are the benefits of a Mortgage Recast?
Mortgage Recasting can reduce your monthly payments, allowing you to free up cash for other expenses or investments. It can be especially beneficial if you’ve recently come into a lot of money such as through inheritance, selling a business, or getting a large year-end bonus.
What are the drawbacks of a Mortgage Recast?
Despite its benefits, mortgage recasting is not always the best financial move. Mortgage recast requires a substantial lump sum payment, which might not be possible for all homeowners. Instead, the large sum could be used elsewhere where it could potentially yield higher returns. It also doesn’t shorten the length of your loan term.
Does every lender offer Mortgage Recast?
No, not all lenders offer mortgage recasting. It’s important to contact your lender to discuss if this service is available and what requirements they may have. Some lenders may charge a fee for the recasting service.
Related Entrepreneurship Terms
- Principal Balance
- Amortization Schedule
- Lump Sum Payment
- New Monthly Payment
- Loan Term
Sources for More Information
- Investopedia: A trusted source that comprehensively covers financial and investment topics, including a detailed explanation of Mortgage Recast.
- Bankrate: Offers in-depth information and advice on various types of loans and mortgages including Mortgage Recast.
- NerdWallet: A personal finance website that gives advice on bank accounts, credit cards, insurance, and more, including information about Mortgage Recast.
- The Balance: Provides expertly crafted content to answer your questions on finance, investing, and mortgages including Mortgage Recast.
