13 Oct

What is a mortgage recast and why do it?

mortgage recast

For borrowers who wish to save money on their mortgage, refinancing the existing mortgage loan is one of the popular choices. However, there is a little-known alternative to this option, and is known as recasting and is sometimes also called re-amortization.

Unlike a refinance, where borrowers pay off the existing loan by borrowing a new loan to reduce their payments, the recast is much easier. The recast mortgage allows the borrowers to continue with the same loan, and for the same duration. Here the borrowers pay off a substantial amount of their unpaid principal amount of their mortgage loan which reduces their monthly payments considerably. By doing this, the lender recalculates the payments based on the new balance amount. Some of the various parameters that are usually used to calculate the new payment may include –

  • the balance amount on the principal
  • the number of remaining payments
  • the interest rate

As the new balance is bound to be lesser to the original one, the borrowers now have to pay lesser payments over the remaining span of the mortgage loan. As a result of this, they can enjoy an increased cash flow which comes from the additional savings on their payments.

Some of the advantages of opting for a recast are discussed below.

Simplicity

One of the primary advantages of a mortgage recast is its simplicity. This is because it does not include the hassle of applying for a new loan, like in the case of refinancing. This saves customers from the annoyance of undergoing the entire process they had already been through while applying for the existing loan. This includes providing several documents such as the income-proof, tax receipts, credit score, etc., which would again be reevaluated by the new lender.

No Credit checks

Customers opting for recasting do not even have to worry about their credit scores, as they already have the loan, and all they are asking for is the re-calculation of the amortization schedule. This means, customers who initially opted for a refinance, but couldn’t qualify due to credit issues, can still qualify for a recast as it does not require a credit check.

Decreased Payments

Mortgage recast eases cash flow as it does not require the similar expenditure of a refinance. Typically, the expenses can reach as much as 6% of the balance. In some cases, instead of the spending on expenses to acquire a refinance, borrowers can use the money to pay off a considerable amount of the principal balance to qualify for a recast.

No Home Appraisal

One of the important criteria which are verified during a refinance is the increase in the value of the property. In case, if there is a drop in the equity of the property, the loan seeker may not even qualify for a refinance. However, the appraisal of the property is not required during a recast, and anyone with an existing mortgage can easily qualify for a recast.

A recasting mortgage can be specifically beneficial for a people who have acquired considerable funds, be it through a sale of a property, or any other means. They can then use the finances to pay down their balance of their existing mortgage loan, and recasting is the ideal option to reduce the payments.

Key Takeaways

  • The recast mortgage allows the borrowers to continue with the same loan, and for the same duration while reducing their payments.
  • A recasting mortgage can be specifically beneficial for a people who have acquired considerable funds, which they can then use to pay down the balance of their existing mortgage loan, which will reduce the payments and increase the cash flow.