When looking to buy a home, finding the best mortgage loan is one of the first orders of business. If you are looking for a way to pay lower monthly payments on an existing loan, then I am sure recasting has come up as an option. Recasting a loan may help you pay lower monthly payments; however, it is not always the right move or even an option for everyone.

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What does it mean to recast a loan?

The most popular application for this technique is with a mortgage loan. Most mortgages have very large principles and long payout timelines. This, paired with steep interest rates, can contribute to years and years of high monthly payments, washing away your plans to save up for that next trip to Disney World. This is where recasting your mortgage may be beneficial. Essentially, recasting a loan is paying a single lump sum of money, in order to reduce the principle amount left on the loan. This will not alter the length of the loan; however, it will decrease the amount paid on each monthly payment for the remainder of the loan and lessen the amount of interest paid overall. “When recasting a loan, the lender will re-amortize your monthly payments. This means that in the remaining months your payments will decrease and less interest will be paid over the life of the loan.” explains Steven Clifford, a loan officer from Flat Branch Home Loans.

For example:

Marcus found his dream home for $225,000.  His mortgage would be extended over a 30-year time period, and he paid a 20% down payment making his actual loan amount $180,000. He would be paying near $1300 dollars per month at a 5% interest rate.

Now let’s say a few years down the road Marcus receives a large raise in his firm and is able to save up $20,000 dollars to put towards his home loan. He calls up his lender to make sure they offer loan recasting and then goes to the bank.

At the bank he will pay a small fee and put the $20,000 towards his mortgage. Now the lender “recasts” his payments for the remainder of the term, as if his down payment was originally $65,000. Due to Marcus’s principal being lowered, the amount of interest per payment has also lessened. He now only pays close to $1,000 per month.

Why not just refinance instead of recasting a loan?

Refinancing is a more familiar option when looking to adjust the monthly payments on a home loan. When refinancing, the key aspect is to lessen your total monthly debt. Two main ways this can be accomplished is through the market having lower interest rates, or by being able to remove the mortgage insurance from the loan. Each of these options will decrease the monthly payments for the loan; however, this is a balancing act. When refinancing a loan there are many costs, including lender fees, underwriting processing fees and title fees. If these costs outweigh the total amount saved from refinancing, then the total monthly debt is not decreased.

For Example:

Cheryl wants to refinance her mortgage payment because interest rates have dropped and she would be paying $100 less per month under the new terms. By refinancing, Cheryl accumulated $2400 of closing costs.

For Cheryl to lessen her total monthly debt she must save more than $2400 from monthly payments. Therefore, if Cheryl has more than 24 months, or two years left on her loan, she has succeeded. On the contrary, if Cheryl only has 20 months of payments left then she will be accumulating more debt.

Recasting or Refinance?

Recasting Pros:

  • Able to keep interest rate if it’s low
  • Lower interest and monthly payments
  • Less paperwork than refinancing
  • One-time transaction fee ($200-$500)

Recasting Cons:

  • Not all banks or lenders will allow it
  • Must have a large sum of money (at least $5,000- $10,000)
  • Some loans such as VA and FHA loans don’t allow

Refinancing Pros:

  • Lower monthly payment (lower interest rate)
  • Mortgage insurance on loan can be removed
  • Generally accepted by most banks and lenders

Refinancing Cons:

  • Closing costs are a minimum of $2,000
  • Large amount of paperwork
  • Interest rates may rise

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Key Takeaway

Recasting a loan may help you pay lower monthly payments; however, it is not always the right move for everyone. Refinancing is a more familiar option when looking to adjust the monthly payments on a mortgage but is very conditional. Recasting and refinancing a loan both have pros and cons that should be considered prior to making a decision.

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