The Mortgage Brothers Show
What is an Example of a Mortgage Recast?
In this episode, we covered mortgage recasts. Normally, this question comes up when a borrower has newly come into a lump sum of money, be it from a recent inheritance, a bonus, or through selling a house, and are interested in a principal reduction.
There two common ways of dealing with the new influx of cash.
- Recasting your mortgage
- Paying down on the principal without a recast
What is a mortgage recast?
Unlike a traditional refinance, with a recast you are basically going into an existing loan, opening it up, and redoing it without starting from scratch.
Let’s say you just came into $100,000 and you started with a $300,000 mortgage. When doing a recast, you would put this $100,000 down toward the principal. You’d tell the bank you’d want to do a recast and they would reduce the balance from $300,000 to $200,000. The time remaining on the loan would remain the same, but your monthly payment would go down which, as a result, would decrease the amount of interest you owe over the term of the loan.
It’s important to note that with recasts neither your interest rate nor the number of years left on the loan will change. It is the loan amount that changes in a recast, no the loan itself. As well, you’ll typically need to have a couple of months of payments under your belt. As a rule of thumb, we recommend at least two. You also can’t just give the bank a $5000 principal reduction and ask for a recast. They will usually require a minimum of $10,000 and some banks will limit you to one recast a year, and just a couple over the lifetime of the loan. You should also expect there to be a fee between, usually, $200 and $300, though it varies from bank to bank.
But it should be noted that because this is not a refinance, there are no appraisals and you don’t have to go through an approval process. There’s just going to be an administrative fee.
If you’re interested in recast, be sure to check with your servicing bank on their rules and whether or not they allow for recasts.
What if you just pay your mortgage?
Say you put the $100,000 down against the $300,000 but you don’t recast. In this case, the bank would apply this to your monthly balance. They would keep your payments the same but the timeline of your mortgage payoff would be accelerated, and as a result, the interest you will end up owing will decrease over time because you would have reduced the number of payments that are left.
When is it right to do a mortgage recast versus just paying down against your mortgage?
A recast is more so for someone who’s on a fixed budget, or fixed income, and they strategically need to get within a certain dollar amount per month. Typically, people who come to us with some extra money will usually decide to simply pay off their mortgage earlier.
Thanks for listening and reading the Mortgage Brothers Show. Let us know if you have any questions you’d like us to answer on this podcast. You can email your questions to Tom@AZMortgageBrothers.com or Eddie@AZMortgageBrothers.com.
Be sure to ask us for a free quote on your next mortgage. We’ll personally work with you and help you through the whole process.
Signature Home Loans LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Signature Home Loans NMLS 1007154, NMLS #210917 and 1618695. Equal housing lender.