July 1, 2021
Many homeowners have never heard of a mortgage recast — sometimes called a re-amortization. Some credit unions and banks offer their borrowers a mortgage recast option. Today we're going to explain what it means if you recast your mortgage and when it's a good idea.
Mortgage Loan Recast Basics
A mortgage loan recast is a service offered by many credit unions and banks on conventional conforming loans and some jumbo loans. Government loans (VA, FHA, USDA) can't be recast.
Here's how it works:
- The borrower pays a lump sum towards the principal of their current mortgage.
- Their lender recalculates the monthly payment based on the new lower balance.
- The term and interest rate stays the same.
- The payment is lowered based on the new principal balance.
How does a mortgage recast work?
As you can see from above, it's a pretty simple process. Although PenFed Credit Union offers recasts, not all lenders do. So, make sure you check to see if this is an option for you before planning on doing a recast.
Using a Loan Recast in a Competitive Seller's Market
Here is an example of a recast mortgage:
Bob and Sue are selling their current home and buying a new one. The problem is the local real estate market is highly competitive. They're worried they'll have a hard time competing against cash buyers — especially if they have a sale contingency. Plus, they don't want to sell their current home before buying a new one and end up homeless.
They consult with their lender and confirm they can do a mortgage recast and pay down their new loan with the sale proceeds from their current home.
The couple is strong borrowers. They have a stable substantial income and little debt. So, they could afford two house payments — their current home and their new home (until they pay off the first loan).
After talking to their lender, they decide to buy a new home before selling their current residence. Once they've settled into their new place, they'll list and sell their old home.
When the sale of their old home closes, they can take their profit and pay down the balance on their new mortgage. Then their lender will recast (re-amortize) their loan, and they'll have a smaller payment.
Should you consider the mortgage recast option?
A mortgage recast could be a great option if your lender offers that service for your particular loan type.
And a recast isn't just for new loans. It's possible to recast a mortgage that you've had for years. A recast is an excellent idea if your current interest rate is low. Here are a few other things to know:
- A recast isn't a new loan
- There's no credit check
- There's no appraisal
But a larger principal payment is required. For example, if you have a $200,000 loan — the minimum payment the lender may require could be $40,000. (20% of the outstanding balance).
Each lender has its qualifications. Here are a few of PenFed's Recast Policies:
- A recast is not allowed if the member has a 30-day late within the last 12 months.
- A recast is allowed on conforming agency and non-conforming loans, but not permitted on Ginnie Mae (GNMA - Government National Mortgage Association) investor loans or VA loans.
- There is a recast fee of $250, which will be assessed to the account.
- A 20% minimum principal payment amount of their current unpaid balance (UPB) is required.
- There are no timeframe requirements (can be done on new loans).
Mortgage Recast Vs. Refinance
There are other times to consider a recast vs. a refinance. Here's an example. You receive a substantial year-end bonus at work. You're thinking about paying your mortgage down and requesting a recast. That could be a good choice if the current interest rate on the loan is low.
On the other hand, if current rates are lower than what you have, consider paying down your mortgage and then refinancing it at a lower rate. In the case of a refinance, you would have closing costs. Plus, you'd be taking out a new loan, so you'd be going through the entire loan process.
With a recast, it's not a new loan, and there are fewer fees. For example, PenFed charges $250 for a recast which is less than doing an entire refi with closing costs. It's important to compare your options to see which is a better financial choice.
So, when you're buying in a competitive market and have a home to sell — consider a mortgage recast as one possible solution. Although you'd have two mortgage payments for a few months until you sold your old home, this solution relieves the stress of not being able to find a new home once yours sells. Make sure to ask your lender to see if a recast would be possible for you.