Mortgage recasting is a way of re-amortizing a current loan to prevent refinancing expenses. Usually, all lenders offer mortgage recasting, even if it isn’t advertised. The cost can start from $250. In most cases, the customer is the one who requests the mortgage to be recast. In mortgage recasting, the amount of monthly payments comes down but the term remains the same. It is allowed to customers who have been regular with their payments. After recasting, the new loan balance would be re-amortized over the remaining life of the loan and this is why the term would remain the same but the monthly installment would be less.
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How Does Mortgage Recasting Work? – In mortgage loan recasting, a lump sum is paid by the borrower to the lender. The loan is recast and the monthly installments are reduced, but the time period remains the same. So, essentially, mortgage recasting lowers monthly rates and the borrower can pay lesser amount for the same time. There is no need for credit checks, unlike loan refinancing. Mortgage recasting works by using windfall gains or inheritance money for paying off outstanding loan amount. It is ideal for situations when refinancing wouldn’t lead to lower rates because of market conditions since the interest is another thing that doesn’t change in mortgage recasting.
EXAMPLE – For a person with a 30 year 5% fixed mortgage of $500,000, the monthly payments come around $2684.11. Thus, after 10 years, $386,710.32 would be left outstanding. Re-amortizing the loan would keep the monthly amount same. However, supposing that after 10 years of waiting, the borrower gets $20,000 through inheritance and wants to put the money towards the principal payment. In this case, the outstanding principal amount would come down to $366,710.32. However, because of the rules of mortgage system, the installments would not change.
If mortgage recasting is requested by the borrower, the remaining lower balance would be re-amortized over the life of the loan. The new monthly installment, in this case, would be $2552.12.
The benefits of mortgage recasting are the most when the borrower expects things in the industry to go down and wants lower liabilities in the future.