If you’ve recently come into a large sum of money, and would like to lower your mortgage payment while saving a significant sum on interest, recasting a loan could be the right move for you. Find out what goes into recasting a loan and how much you could save.
In This Article:
- What Does Recasting a Loan Involve?
- Reasons You May Want to Recast Your Loan
- Benefits of Recasting a Loan
- When You Can and Can’t Recast a Loan
- Alternatives to Loan Recasting
Loan modification or refinancing are both common ways to adapt your loan payment to suit your needs. Less well-known is the practice of mortgage recasting, which can not only lower your monthly payment but reduce the interest paid over the life of your loan.
What Does Recasting Your Mortgage Involve?
Recasting a mortgage loan involves paying a large lump sum towards the loan principal, then having your loan reamortized, or recast, to reflect the new loan amount.
Unlike a loan modification, which often changed the term length of the loan, or loan refinancing, which can be used to obtain a lower interest rate, loan recasting simply recalculates your mortgage payments for the life of the loan based on the new, lower balance.
Find out how much you could save on interest by using our mortgage calculator to compare the old and new balance and payments.
Reasons You May Want to Recast Your Loan
One of the most common reasons for recasting a loan is if you buy a new home before you sell your old one. You may have to make a smaller down payment on the new home purchase because a lot of your assets are tied up in the equity of the home you already own.
Once you sell your original home, you can take a large portion of the proceeds and put it towards the principal balance on your new home. This can significantly cut your mortgage payments and you’ll end up saving a ton of interest over the next 20-30 years.
Other reasons to recast a loan include coming into an inheritance, being gifted a large sum of money, or receiving an investment distribution. As long as you have around $5,000 or more, you can get your home loan recast and reduce your mortgage expenses.
Benefits of recasting a loan
If you pay a lump sum towards your mortgage, you lower your balance, but your payments stay the same. Depending on the terms of your loan, you might not realize much savings at all.Recasting changes the payments based on a new calculation of the balance, saving you money on interest. For example:
Suppose you have just purchased a new home with a 30-year fixed rate mortgage . Your loan is for $200,000 at just under 5% interest. Your monthly payment is just over $1,070.
You sell your original home, realizing a $40,000 profit. You apply the $40,000 as a lump sum payment against the $200,000 balance on your new loan, bringing the principal down to $160,000.
You still have a 30 year fixed rate mortgage at 5% interest, but your monthly payment drops to around $870, meaning you are paying around $200 less every month for the life of your loan.
Over your loan term, you save more than $45,000 in interest, less your loan recasting fees, which are generally minimal.
Unlike a refinance, you don’t have as much work to do or documentation to provide for a loan reamortization. There’s no need for an appraisal, and no closing costs. The one thing that might be required is a history of on-time payments.
When You Can and Can’t Recast a Loan
In most cases, with conventional loans, recasting is as simple as calling your lender and setting up the lump sum payment towards the balance and then the reamortization. You’ll pay a small fee, sign the new documents, and be done.
However, loan servicers aren’t required to recast loans, and not all mortgages are eligible for loan recasting. For example:
- Fannie Mae and Freddie Mac loans can typically be recast
- Federal Housing Administration (FHA) and Veterans Affairs (VA) loans cannot be recast
- Jumbo and non-conforming loans may be recast but only if certain conditions are met and the lender is amenable
How Big a Lump Sum is Required for Recasting a Loan?
Lenders have different requirements when it comes to the amount that will qualify a loan for recasting. If you purchase a home with the intent to recast, make sure you check with the lender about the parameters for recasting later.
You might need to meet a minimum lump sum amount, or there could be restrictions on how soon you can recast a loan after acquiring it. You might also need to have a certain amount of equity in your home before recasting, so check before you buy a home with a low down payment intending to recast swiftly.
Alternatives to Loan Recasting
Unless you are confident you won’t need the money elsewhere, you may want to consider saving some money against future emergencies rather than tying it all up in your mortgage.
If you use all of your available cash for a lump sum payment to get a loan recasting, then the only way to raise funds quickly to cover other expenses will be a home equity loan. This can mean a new monthly payment at a high rate of interest.
If you have an excellent mortgage rate, you may want to consider investing extra funds instead of putting them against your mortgage balance. This assumes that you can make investments that will earn more over the life of your loan than the interest savings from a reamortization would yield.
If you want to get a lower interest rate, you can refinance your loan. This will drop your payment and let you keep your cash to put towards other things. You can also refinance to change your loan term, which can also lower your monthly payment.
Finally, refinancing an FHA loan into a conventional loan often means you can remove a previous requirement for private mortgage insurance (PMI) reducing your monthly obligation.
Why Choose Sammamish Mortgage?
If you feel your monthly payment is too high, and have a large sum of cash you’d like to put towards your loan balance, loan recasting might be the best option for you. You can swiftly apply for a loan reamortization, and you won’t have to deal with document verification, appraisals, or closing costs.
The fee to do a loan recasting is typically quite affordable and varies depending on your loan servicer. You may be able to reamortize with a lump sum payment as small as $5,000. Sammamish Mortgage loan officers can help you understand your options and figure out if refinancing or recasting is the best option for you.
Sammamish Mortgage has been in business since 1992, and has assisted many home buyers in the Pacific Northwest. If you are looking for mortgage financing in Washington State, we can help. Sammamish Mortgage offers mortgage programs in Colorado, Idaho, Oregon and Washington.
Contact us if you have any mortgage-related questions or concerns. If you are ready to move forward, you can view rates, obtain a customized instant rate quote, or apply instantly directly from our website.