Recasting is a method of re-amortizing a home loan for borrowers that have paid down their mortgage faster than anticipated. By increasing the monthly mortgage payment or making a single large balloon payment on the mortgage, the homeowner prepays her mortgage, reducing the time required to pay the mortgage by months or years. The borrower can request that the lender “recast” the terms of the loan to reflect the reduced remaining balance over the remaining contractual term of the loan at the same interest rate. As a result of recasting, the required mortgage payment goes down, giving borrowers more financial flexibility to make mortgage payments and meet other financial obligations. Where borrowers have prepaid their mortgages, some lenders are now allowing borrowers to “recast” the terms of their mortgages in an effort to stem the tide of foreclosures and prevent further losses.
Barney and Betty Dodd purchased their house in 2006 for $200,000 and put $10,000 down. By 2012 the value of their home has dropped to $175,000, and they still owe $188,000 on their 30-year mortgage. The couple decides to cash in $40,000 worth of savings bonds and send the money to their lender with a request to recalculate the payment based on the reduced balance of $148,000 over the time remaining on the loan. The lender agreed to do this and the couple was able to secure a much lower house payment as a result.
Advantages of Recasting
If you have made extra payments to reduce your mortgage, you are a candidate for recasting. The obvious advantage of recasting is the lower monthly payment on your home loan. But recasting is also much faster and easier than refinancing and may make it easier for you to keep making the required mortgage payments in case your income drops. Recasting also costs considerably less than refinancing; the fee for this service is usually only a few hundred dollars and no home appraisal or credit check is required.
Terms and Criteria
Most lenders require homeowners to be able to make a lump-sum payment of at least a certain amount of the loan, such as 10%, or a minimum dollar amount, such as $5,000. Most conventional and conforming loans can be recast, but VA and FHA loans are not eligible. However, lenders are not legally required to do this for any borrower, and only those who are current on their payments can apply for this service. Some lenders also choose to simply modify their loans by perhaps reducing the interest rate instead of recasting them.
The Bottom Line
Recasting offers borrowers who have prepaid their mortgage a method of reducing their monthly mortgage payments. Once a loan is recast, you can still decide to increase your monthly payment or make another balloon payment if you have enough financial flexibility. Making a balloon payment on a house today just to recast the loan may not always be the best option. For example, a family that is struggling to pay its mortgage and other bills each month that inherits $50,000 from a deceased relative may be better off using the money to pay off car loans, credit cards or other nondeductible debt. If the payments for these items are reduced or eliminated, then the mortgage becomes more affordable. For more information on recasting your mortgage, consult your mortgage lender or financial advisor.