A mortgage recast is when the borrower makes large payments to reduce the principal amount. The lender re-amortizes the loan according to the new balance in the account. The recast can be calculated with the calculator, explained in the article, and other details.

What is Mortgage Recast?

In banking, a mortgage is a borrower's loan to purchase land, a plot, a house, or other real estate. The borrower needs to pay the loan amount every month. In contrast, the Mortgage Recast is a process where large payments are made to reduce the principal amount. So, the lender re-amortizes the loan amount with low monthly repayments per the new balance.

Though the loan is recast, the interest doesn't change and is still fixed during the loan process. The loan term also doesn't change if the loan is recast. Though some loans have recasting, only some mortgages have a standard recasting, such as an FHA loan, USDA loan, or VA loan. Still, the lender can make some modifications if the borrower struggles.

How does Mortgage recasting work?

Repaying the loan amount is a difficult task, which causes struggles. The lender can follow a mortgage recast, where the borrower does not need to pay the loan amount early but pays the amount by matching the schedule of the new balance amount.

To recast the loan amount from the lender, the borrower must pay a lump sum, or some ask for a certain amount along with a fee. Once the lump sum amount is paid off, the lender again amortizes according to the remaining new balance into monthly payments for a fixed time. The latest repayment schedule has new monthly payments, principal amount, interest, repayment tenure, etc.

How to Calculate Mortgage Recast?

Every borrower calculates the loan amount and repayment with the respective calculator, which includes interest, repayment tenure, and other variables. Mortgage Recast is also computed using the amortization calculator. This calculator reduces the borrower's struggle, making calculating the payments more manageable.

The essential things for the amortization calculator are,

• Remaining balance
• Interest rate
• Recasting payment
• Current monthly payments
• Total Recasting cost

For example, a borrower took a $200,000 loan at a 5 percent interest rate with a 30-year tenure period. The monthly payment becomes $1,074, which becomes $162,684 after approximately 10 years. Later, the borrower decides to recast $50,000 as a lump sum with $250 as a fee. So, the remaining balance becomes $112,684, and the borrower only needs to pay $744 per month for the next 20 years.

Requirements for Mortgage recasting:

Any mortgage borrower must meet a few criteria to qualify for the Mortgage recast. They are,

• The borrower should not have a government-backed loan like an FHA, VA, or USDA loan.
• As a borrower, you must have to meet specific equity requirements.
• A lender asks for a lump sum for the recasting, and the borrower must meet specific minimum principal reduction requirements.
• Must have a good payment history.

Pros and Cons:

Pros

• Through this process, the borrower can save money on the interest, which can be thousands of dollars.
• This reduces the monthly payment amount.
• Recasting doesn't allow the new loan to be initiated, so there is no credit or income check.
• The upfront charges become cheaper.

Cons

• Even though the payment amount becomes low, the interest rate doesn't change.
• The borrower cannot pay the total loan amount before the repayment term.
• Some lenders ask for a specific lump sum amount, which can be high for some borrowers, so there might be better investments for upfront costs.
• A few borrowers don't accept the recasting based on the loan types.

When is the right time for mortgage recast?

When a borrower takes an amount as a loan, there are specific requirements and rules that they have to follow. A borrower can recast their Mortgage when the interest rate is fixed or goes up. If the interest rate is fixed, the monthly payment becomes low.

Suppose the loan amount borrower has a low credit score or is self-employed. In that case, they can consider recasting, as approval is unnecessary. Compared to refinancing, recasting doesn't need any approval process, which makes it more accessible. A borrower's low credit score impacts the high interest rates in refinancing.

Conclusion:

Mortgage Recast is when a borrower pays off a lump sum amount to the lender. This reduces the monthly payments, with a constant interest rate and payment tenure. With the amortization calculator, any borrower can calculate the recasting amount, which is easier before consulting the lender. This recasting is only acceptable on some loan types and is favorable when the credit score is low.