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This lesser known alternative to refinancing can lower your monthly loan payments without the hassle of a credit check.
If you financed your house with a mortgage and want to lower your monthly payments, you might be able to do so by recasting it. A recast mortgage reamortizes — or restructures your payments towards both principal and interest — after you pay down a lump sum of money.
If you can afford it, or have enough extra cash, you can put the money toward your principal balance to reduce the amount of overall interest you’ll pay over the course of your loan. A lesser-known alternative to refinancing, a recast mortgage can be an attractive way to save on monthly payments, but its financial benefits will depend on your circumstances.
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Determine that you have the right kind of loan. Only certain kinds of mortgages can be recast. Government-backed loans like FHA or VA mortgages cannot be recast, while conventional loans and nonconforming loans, like a jumbo mortgage, can only be recast on a case-by-case basis.
Make a formal request with your lender. Mortgage recasts are hardly advertised by the loan servicer. Some do not allow them at all, while others may voluntarily extend you an offer once you’ve paid off a chunk of your principal balance.
Pay a lump sum on your mortgage. Either a set amount towards the principal or percentage of it, the required lump sum payment amount usually ranges from $5,000 to $1,000 or up to 10%. The bigger the lump sum, the greater the reduction in your monthly payment.
Follow a new amortization table, or the payment plan set by your lender for paying off the mortgage. Based on your newly reduced loan balance, the lender will calculate a new monthly payment. In almost all cases, you’ll end up with lower required minimum, and pay less interest over time.
Because recasting can take time to process, remember to make your usual mortgage payments until the account reflects the new payment amount.
Generally you can recast a loan more than once. Keep in mind that recasting a mortgage is not the same as making extra payments or prepayment on your loan.
If you pay a lump sum on your own without recasting, you have effectively lowered your principal amount, but not your monthly payment. Because no amortization occurs, you will continue payments based on schedule set by your lender. However, one benefit to this is that you could potentially pay off your loan faster. A mortgage recast will not decrease your term length.
The biggest takeaway when considering a recast mortgage is that it will not lower interest rates or shorten the remaining term. If you are looking to pay off your mortgage faster, you can still make higher payments after the recast. (Read our guide to paying off your mortgage in five years.)
But if you want smaller monthly payments, a recast mortgage could be right for you. Let's look at an example of how much you'd pay before and after mortgage recasting.
With a 30-year, fixed-rate mortgage with a $200,000 principal amount and 4.5% interest rate you would pay a $1,013 monthly payment. After five years of steady payments and a large injection of cash of about $10,000, you reduce your principal loan to $170,000. With a recast you will be responsible for a $945 monthly payment for the remaining 25 years of the term.
A recast mortgage is a good idea only if you think the decrease in monthly payments is worth the lump sum you paid up front. Some may deem the reduction too small, and their money better serviced elsewhere—maybe paying off any outstanding finances, like student loans or credit card debt. A big disadvantage of a recast mortgage is having less cash on hand at least in the present.
At a glance here are the benefits of recasting:
And the disadvantages:
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Refinancing a mortgage happens when you get a new mortgage to replace the old one. It’s a common option primarily for borrowers seeking lower interest rates or shorten term lengths, or change other loan features — like going from a fixed-rate to adjustable-rate mortgage.
A refinance requires you to go through the hoops of applying for a mortgage all over again by getting a credit check and appraisal, since you’re getting an entirely new loan.
Though you can get a lower interest rate with a mortgage refinance, you might still pay more interest in the long run, since you’re restarting a loan term from scratch with a brand new mortgage.
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