Mortgage recast (also known as loan recast or re-amortization) is a strategy by which homeowners can reduce their monthly mortgage payments and save on the interest paid over the life of the loan. It allows borrowers to pay a large, lump-sum amount toward their principal in order to reduce their monthly mortgage payments. In other words, the interest rate and the loan term remain the same; however, the monthly payments will be lower, following the decrease in the principal amount.
Mortgage recasting is a way to reduce the interest expenses without shortening the loan term, where remaining payments are calculated based on a new amortization schedule, and is ideal for people who recently received a large sum of money and want to reduce their mortgage expenses. Thus, if a person’s main objective is to reduce monthly payments rather than paying off their loan faster, then a recast could be considered. However, not all loans are eligible for recasting, and some of the lenders may charge a fee for the service.
Suppose, if a person holds a 30-year mortgage carrying a principal balance of S200,000 with a 5% interest rate, they may pay $1,200 per month. In such a case, spending around $50,000 on recasting can help them save about $300 per month in monthly payments and almost $35,000 in principal payments.
Recasting allows borrowers to pay a large, lump-sum amount toward their principal in order to reduce their monthly mortgage payments.
It is a way to reduce interest expenses without shortening the loan term, where the remaining payments are calculated on the basis of a new amortization schedule.
Compared to refinancing, recasting is relatively inexpensive and easier to do.
Recasting vs. Refinancing
Refinancing a mortgage means paying off the existing loan by obtaining a new loan. Even though both refinancing and recasting can help borrowers save money, recasting is largely appealing as it is relatively inexpensive and easier to do.
Unlike refinancing, recasting allows borrowers to keep their existing loans. Borrowers need to pay closing costs and appraisal while applying for a brand-new loan in case of refinancing. Additionally, they can also end up with a new mortgage as well as new interest rates. Thus, recasting can be a cost-saving alternative, considering the large outlay of capital costs in refinancing.
People typically opt for refinancing to get a lower interest rate – which is not possible with recasting – or to move from an adjustable-rate mortgage to a fixed-rate mortgage. Hence, recasting is ideal when a person’s taken out a low-interest, fixed-rate mortgage and wants lower monthly payments.
Types of Loans that can be Recast
1. Negative amortization loans
In the case of negative amortization, the payments on a loan are lower than the interest costs. Thus, the principal owed increases over time as the amount of deferred interest is added to the principal balance. As the principal amount increases over time, negative amortization mortgages require that the loan is recast at some point so as to pay it off before the scheduled term.
2. Home equity loans
Home equity loans allow borrowers to use their home equity as collateral, where the value of the property determines the loan amount. Homeowners looking for a way to lower their monthly mortgage payments without changing their interest rate or loan terms can consider a mortgage recast. However, home equity lines of credit (HELOCs) will automatically be recast when the initial draw period ends based on the outstanding loan balance.
3. High-balance loans
Conventional loans are traditional mortgage loans that are not secured by the government and are backed by Fannie Mae and Freddie Mac. In the case of high-balance loans, the loan amount exceeds the conforming loan limits. Recasts are allowed on conventional, conforming to Freddie Mac and Fannie Mae loans.
4. Payment option adjustable-rate mortgages
Adjustable-rate mortgages are loans that give borrowers different payment options each month, which include paying all of the principal and interest or paying an amount that covers only interest or paying a minimum amount that does not cover the interest.
While the choices available with an adjustable-rate mortgage allow for more flexibility on payments, the borrower’s debt may actually increase, resulting in payment shock. It increases the likelihood that the negative amortization limit will be reached, and the mortgage will be recast.
Drawbacks of Recasting
Recasting doesn’t shorten the loan term. If a loan comes with a 25-year amortization period, the borrower needs to pay a mortgage over 25 years.
The interest rate remains the same in case of recasting just as the mortgage length. If the interest rate is particularly high, recasting is a bad option.
Mortgage recast also reduces overall liquidity as contributed funds are tied up in the home equity. Borrowers wanting the cash may either need to sell their homes or use home equity financing.
Most loan providers often charge a fee for recasting, which adds to the total cost of borrowing to the debtor.