John Meussner Mortgage and Lending Costa Mesa, CA (949) 247-7530 Contact Profile
What is a mortgage loan recast?
A mortgage loan recast is a relatively unknown feature of many
different types of mortgage loans, in which a borrower with a lump sum of money can apply funds to their principal balance and effectively reduce their monthly payment for the remainder of the loan. Terms of the loan do not change, as everything from the interest rate to the amortization period remain the same, but the monthly payment is reduced because the loan is "recast", or recalculated based off of the reduced principal amount.
In recent years with rates consistently falling, there hasn't been much need for the recast feature, but in the future when rates rise (yes, they will rise) the recast feature is something that could be important for home owners looking to increase their monthly cash flow.
What are the benefits?
The major benefit of a loan recast is a permanent reduction to the monthly payment of a loan, without adding years to the loan. A mortgage that is recast will be paid off in the same amount of time that the original note stipulates. Whereas a refinance can add a substantial amount of money to the principal balance or years to the loan, most loan servicers charge only a nominal fee for a borrower to exercise a recast option, typically just a few hundred dollars.
Another benefit that many people overlook are the additional options that increased home equity can present, such as the ability to get a home equity line of credit.
There are no huge negatives to a mortgage loan recast, but there's plenty to think about before going through with it. Perhaps the biggest decision to make is whether applying a large sum of money toward the mortgage is the best
use of that money. This is where a conversation with your financial planner is needed.
Also, not all loans can be recast. While most conventional loan servicers offer the option, FHA and VA loans do not have the feature. Jumbo & portfolio loans sometimes have the option, depending on the investor/servicer, so it's important to ask when taking out a new loan if you'll have the ability to recast.
A final downside to consider is that a loan recast does not pay off your mortgage any faster. If your goal is to get rid of the mortgage, accelerated payments or a bi-weekly payment schedule could be a better option.
How do I recast my loan?
It starts with a simple phone call to your loan servicer if you've got a large sum of money you'd like to apply to your mortgage and would like to see a lower monthly payment. Every servicer has different fees, different requirements, and a different process. Some won't even offer a 'recast' but will instead offer a 'modification'. Some lenders have minimum requirements, such as a minimum amount of money that must be applied to the mortgage in order to have the payments recast.
A mortgage loan recast isn't a feature most people will ever need to concern themselves with, but it can be a great tool to increase home equity & monthly cash flow in one fell swoop, so when shopping for a mortgage loan it's important to know if your new loan will have a recast feature (and what other features the loan has or does not have).The best way to learn about the features and intricacies of your new loan? Work with an experienced, knowledgeable lender!
By John Meussner Mortgage and Lending with Mason-McDuffie Mortgage, Conventional Loans, Jumbo Loans, FHA, 203(k), USDA, VA, NMLS #138061 TMSNMLS 2764
Posted on June 17, 2014 10:46 AM