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Mortgage Recast

Definition

A mortgage recast, sometimes called “re-amortization” , is a process that lowers your monthly mortgage payments. It happens when a large payment is made toward the loan principal, resulting in the reduction of the remaining balance. The lender then recalculates the monthly payments based on the lower balance, usually keeping the original loan term and interest rate.

Phonetic

The phonetic transcription of “Mortgage Recast” is /ˈmɔ:rɡɪdʒ riːˈkæst/.

Key Takeaways

  1. Lower Monthly Payments: Mortgage recasting is a strategy useful for homeowners who wish to lower their monthly payments. This is achieved by making a large, lump-sum payment toward the principal balance, thereby reducing the amount on which interest calculations and subsequent monthly payments are based.
  2. No Change in Interest Rate: Unlike refinancing, a mortgage recast does not change the interest rate or term of the loan. The interest rate remains the same, but the balance on which it’s calculated is smaller, resulting in a lower amount of total interest paid over the life of the loan.
  3. Eligibility and Fees: Not all mortgages or lenders allow for recasting. Homeowners must check with their lender about its policies and fees associated with a mortgage recast. Often, a fee is involved, but it could be substantially less than the closing costs of a refinance.

Importance

A mortgage recast is an important financial term as it refers to the process of adjusting the remaining unpaid balance of a mortgage, hence affecting the size of the monthly payments owed by the borrower. If a borrower makes a large, lump-sum payment towards the outstanding mortgage balance, the lender can perform a recast which will lower the monthly payments while keeping the loan’s existing interest rate and term constant. This is particularly beneficial for homeowners who suddenly come into more money through an inheritance, bonus, or large financial gift, and wish to reduce their monthly expenses. Consequently, understanding what a mortgage recast entails can greatly influence one’s financial planning and management strategies, especially when it comes to managing mortgage payments and personal cash flow.

Explanation

Mortgage recast, also known as re-amortization, is a financial tool utilized by mortgage holders to alter the terms of their mortgage. The main goal is to decrease their monthly payments, making managing the loan more affordable in the long run. This strategy is often undertaken when a homeowner comes into a significant amount of money, such as a large bonus or inheritance, which they would then contribute as a substantial lump sum to their mortgage principal. By doing so, the borrower is able to substantially decrease the principal balance of their loan, therefore leading to lower monthly repayment amounts.In addition to lowering monthly payments, mortgage recast also holds the potential to shorten the overall term of a mortgage if the homeowner continues to make their original mortgage payments. Further, it is a useful tool for individuals looking to manage their debt-to-income ratio better, since it decreases the monthly payment obligations. However, it is important to note that not all mortgages or mortgage lenders offer the recasting option, and there might be fees involved in the process, which means research and negotiation are crucial steps before deciding to recast a mortgage.

Examples

1. A homeowner with a mortgage of $400,000 at a 4.5% interest rate who has made regular payments for several years decides to make a lump sum payment of $100,000. The homeowner’s bank allows mortgage recasting, so for a small fee, the lender recalculates the monthly payment based on the new balance of $300,000. The interest rate and term of the loan remain the same, but the homeowner’s monthly payments are now reduced due to the mortgage recast.2. An empty-nester couple decides to sell their larger family home and downsize to a smaller property. With the profit from their home sale, they pay off a significant portion of their new home’s mortgage and then opt for a recast. With the recasting, their monthly mortgage payment becomes significantly smaller, making it more manageable for them in their retirement years.3. A property investor who rents out a series of apartments gets a significant financial windfall from a business venture. He decides to use this money to pay down a large portion of the mortgage on one of his buildings and then requests a recast from his lender. The lender recalculates his loan based on the reduced principal balance, which lowers his monthly payments and increases his monthly rental income profit.

Frequently Asked Questions(FAQ)

What is a mortgage recast?

A mortgage recast, also known as re-amortizing, is a term that refers to the process of reducing your monthly mortgage payments by paying a large sum of money towards your loan and then restructuring the remaining balance.

What happens once I recast my mortgage?

Once you recast your mortgage, the principal balance of your loan reduces and your payments are re-calculated based on the new amount. The interest rate and term of your loan remain the same, but you’ll be left with a lower monthly mortgage payment.

How can I avail of a mortgage recast?

The availability of mortgage recast may vary from lender to lender. If your lender offers recasting, you’ll typically need to make a substantial lump-sum payment on your existing mortgage principal and pay a fee to the lender to recast your mortgage.

How is mortgage recast different from refinancing?

Refinancing involves taking out a new loan to replace your existing mortgage, potentially with a lower interest rate or shorter term, whereas recasting keeps the same loan but alters the amortization schedule due to a large payment made against the principal.

How often can I recast a mortgage?

The rules on how often you can recast your mortgage depend on the guidelines set by your lender. Some lenders might allow you to recast once during the term of the loan, while others may allow multiple recasts.

Can I recast an Adjustable Rate Mortgage (ARM)?

Typically, only fixed-rate mortgages can be recasted, whereas, Adjustable Rate Mortgages (ARMs) usually cannot be recasted. However, rules can vary with different lenders.

What are the benefits of a mortgage recast?

Mortgage recasting can help lower your monthly payments without the need to qualify for a new loan. It also lets you pay less interest over the loan term because of your reduced principal amount.

Are there any downsides to recasting a mortgage?

While a recast might lower your monthly payments, it doesn’t change your interest rate or shorten your loan term. So, if interest rates are lower than what you’re currently paying, refinancing might be a better option. Also, the lump-sum payment is towards the principal amount and may not yield a high return on investment compared to other investment routes.

Related Finance Terms

  • Principal Balance: This is the remaining amount of the mortgage that needs to be paid off. It decreases each time a payment is made against the mortgage.
  • Amortization Schedule: This is a complete table of periodic loan payments that shows the amount of principal and the amount of interest that comprise each payment.
  • Lump Sum Payment: A significant one-time payment, typically made when mortgage recasting, used to reduce the outstanding principal on a loan.
  • Loan Term: The amount of time one has to pay off the mortgage, commonly 15 or 30 years. After a mortgage recast, the loan term doesn’t change but monthly payments are lower due to the lower principal amount.
  • Interest Rate: The percent of principal charged by the lender to borrow money. In mortgage recasting, the interest rate usually remains the same but the total interest paid over the life of the loan decreases due to a lower principal.

Sources for More Information

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