I’m frequently asked about loan recasting: what it is, how it works, and when it makes sense. It’s not widely discussed, in large part because it’s not available from all lenders and is only available on conventional loans. In some circumstances, it’s the ideal solution.
Loan recasting is the reduction of monthly loan payments without modification to the terms or interest rate of your current loan. Monthly mortgage payments are reset when a significant amount (reducing your current loan balance by at least 10%) over and above regular payments is paid toward the principal. If you know you have a large chunk of money that you want to put towards your mortgage, doing a recast is a way to have those funds reduce both your mortgage interest and your monthly mortgage payment.
Recasting doesn’t result in an early payoff, but it does reduce the amount of interest you’ll pay over the life of your loan because it recalculates your loan payment and amortization schedule based on the new lower principle balance of your mortgage loan. Additionally, no appraisal or credit check is required for a loan recast which may make it appealing for some homeowners. Fees for loan recasting vary from lender to lender but could range in the $250 to $500 amount. It is also important to know a recast is only available once for the life of a mortgage loan.
It may not be the right option if it consumes most or all of your cash savings, or if you could significantly reduce your interest rate by refinancing. If your goal is to simply pay off your mortgage sooner, talk with your lender about the best way to accomplish that given your circumstances.
What does this mean for you? It’s more important than ever to choose a lender that does not re-sell loans, so that you can maintain a trusted point of contact to advise you throughout the length of your mortgage.