After publishing an article on mortgage refinancing, a reader inquired if I had considered recasting a mortgage instead. Although I have consistently chosen to refinance my properties since 2005 to secure the lowest rates possible, recasting does have its benefits.
What is Mortgage Recasting?
Mortgage recasting involves recalculating your mortgage payments based on a reduced principal balance. This occurs after you make a significant lump sum payment towards the principal. For instance, suppose you have a 30-year mortgage at 4% interest, with a principal of $500,000. If you inherit $200,000 and apply this to your mortgage, reducing the principal to $300,000, the total amount you owe is recalculated, potentially lowering your monthly payments significantly.
Advantages of Mortgage Recasting
– Lower Monthly Payments: By reducing the principal, your monthly payments decrease, which can free up cash flow.
– Simplicity: Recasting a mortgage is usually a straightforward process without the need for an appraisal or credit check, saving both time and money.
– Less Interest Paid Overall: Applying a large payment to the principal can significantly decrease the total amount of interest paid over the life of the loan.
Eligibility and Process
To recast your mortgage, you typically need to make a substantial payment towards the principal—often at least 5% of the remaining balance. There may be a small fee, but it’s generally less than $300. However, not all loans are eligible for recasting; it’s commonly available with conventional loans backed by Fannie Mae or Freddie Mac, but not with FHA or VA loans.
Disadvantages of Mortgage Recasting
– Requires a Large Lump Sum: The biggest hurdle with recasting is that you need a significant amount of cash upfront.
– Interest Rate Remains Unchanged: Unlike refinancing, recasting does not lower your interest rate. If rates have dropped significantly since you secured your original loan, refinancing might be a more cost-effective choice.
– No Term Reduction: Recasting does not shorten the term of your mortgage; it only lowers the monthly payments.
Ideal Candidates for Mortgage Recasting
– Those who need to reduce monthly expenditures but have substantial cash on hand.
– Homeowners satisfied with their current mortgage rate and not looking to undergo the more intensive process of refinancing.
– Individuals with suboptimal credit scores that might not qualify for beneficial refinancing rates.
Real-Life Applications
Recasting might be particularly useful if you’re transitioning between homes and need to manage two mortgages simultaneously due to a delay in selling your previous home. By recasting one mortgage, you can potentially reduce your financial burden during this period.
Final Thoughts
While I’ve personally opted to refinance to achieve lower rates, recasting is an excellent option for those who may not qualify for refinancing or who wish to avoid the lengthy and sometimes costly process associated with it. Always consider your financial situation and goals: if reducing your monthly outlay and improving cash flow are priorities, and you have the necessary funds for a significant principal reduction, recasting could be the right strategy for you.
In essence, whether to refinance or recast depends on your individual financial circumstances, the terms of your existing mortgage, current interest rates, and your long-term financial goals. Each has its merits, and the best choice varies by personal situation.
