How to Decide Whether to Recast a Mortgage

If refinancing isn't an option, you can try to recast your mortgage.

If refinancing isn't an option, you can try to recast your mortgage.

Even if you don't qualify for, or just don't want to bother with, a mortgage refinance, you may be eligible for a loan recast. In a recast, you pay a significant amount of money to reduce the principal balance of your mortgage loan. Once you do this -- say, by paying $10,000 to reduce your loan's principal balance from $200,000 to $190,000 -- your lender re-amortizes -- or recalculates -- your monthly loan payment based on the new amount that you owe. Consider several financial factors, though, before you apply for a recast.

Determine if you can qualify for a refinance. When interest rates are low, you can refinance your existing mortgage loan into a new loan with lower rates. However, most conventional lenders require that you have at least 20 percent equity in your home. Lenders also reserve their lowest interest rates -- the ones that make a refinance financially feasible -- for those borrowers with credit scores of 740 or higher. If you don't have enough equity or a low enough credit score, you might not be able to refinance.

Call your mortgage lender and ask if your loan is eligible for a recast. Not all lenders offer recasting. And you won't be able to recast a loan insured by the Department of Veterans Affairs or the Federal Housing Administration. You can generally only recast mortgage loans if they are conventional mortgage loans originated by private mortgage lenders or those owned or guaranteed by Fannie Mae or Freddie Mac. Your lender will be able to tell you whether your loan might qualify for a recast.

Study your finances. Do you have enough money to pay off a significant chunk of your principal balance? Recasting your mortgage won't result in much of a drop in your monthly payment if you can only scrounge up $1,000. You'll need to drop your mortgage by a much higher amount if you want to lower your monthly payment by a significant amount. For instance, for a $200,000 30-year fixed-rate loan at 6 percent, by paying off $10,000 of your principal balance, your monthly payment will only drop by $60 a month. If you can pay off $20,000 of your mortgage loan, your payment will drop about $120 a month. A loan recast makes the most sense for homeowners who have received a large bonus, inheritance or other lump-sum payment.

Analyze your long-term financial goals. If your main goal is to pay off your mortgage loan faster, you won't accomplish it with a recast. After a recast, your loan's terms remain the same; if you had a 30-year fixed-rate mortgage loan before recasting, you'll have the same 30-year fixed-rate loan after recasting. If you want to pay off your loan faster, a better choice might be to make mortgage payments twice a month or make larger mortgage payments each month. If your goal, though, is simply to spend less on your mortgage payments each month, a mortgage recast might make sense.

About the Author

Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.

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