A mortgage recast allows you to keep your existing low interest rate (in the 2% - 3% range), avoid closing costs associated with a new jersey mortgage refinance ($3,000 - $5,000), and reduce your monthly payment! It is no wonder that mortgage recasts have become extremely popular in 2022 and 2023. If you’re thinking that this sounds a little too good to be true, you are ABSOLUTELY right!
Should you recast your mortgage? What is a recast? What is the benefit? What are the drawbacks? When should you recast vs refinance? How much does it cost to recast? All of these questions and more are answered below.
The purpose of recasting a mortgage is to reduce the minimum monthly mortgage payment. Most of the best home loan officers in NJ have two options for mortgage recasting:
1. Reset my loan back to its original term. For example, if you pursued a 30 year loan and have been paying for 3 years, then a recast will set your loan back to 30 years.
2. Keep my loan term exactly as it is today. For example, if you have been paying for 3 years then a recast will be a 27 year loan term.
The second option (keeping the same loan term as I have now) is much less common and may only be available if the borrower requests it.
The next element of a recast is typically a minimum ‘principal only’ payment. Although the minimum amount of this payment varies between residential mortgage NJ loan servicers (companies that collect mortgage payments), $10,000 is a popular minimum amount that must be paid toward principal to complete a recast.
With all of this in mind, let’s review an example to explore the monthly payment benefit of recasting a mortgage loan. Let’s assume that you have held your current loan for three years, your original loan amount was $500,000, you pursued a 30 year fixed rate loan, and that your interest rate is 2.75%.
Your monthly payment with that loan (principal and interest) would be $2,041.
Let’s assume that you have made your normal monthly payment and have not made any extra principal payments. This would leave the remaining balance of your loan balance at $466,439. Suppose you decided to recast your loan by paying an extra $10,000 towards principal, and you chose option 1 above to set your loan term back to 30 years. Your new monthly mortgage payment would be $1,863. In this example, your monthly payment is reduced by $2,041 - $1,863 = $178 per month (a 9% reduction in your monthly payment).
Let’s review another practical application for mortgage recasting. You’re purchasing a new primary residence, and you own an existing primary residence. Due to the timing of the sale and purchase, you end up purchasing the new property several months before selling your existing home. Once your property sells, you have an extra $300,000 that you would like to use to pay down the principal of the loan.
For this example, let’s assume your new home price is $850,000, you are putting 5% down payment, your loan is $807,500, you locked in a 7% interest rate for a 30 year fixed rate loan, and your monthly principal and interest payment is $5,372. After 3 months, your existing home sells and you want to explore the option to recast your mortgage. The existing lender confirms that the recasted loan will be for a new 30 year loan, and that you can put all $300,000 (from the profit of your sale) towards the principal balance of your existing loan (bringing the new balance to $507,500). In this example, your mortgage payment will decrease from $5,372 to $3,376 per month. This is a $1,995 monthly mortgage payment reduction.
The purpose of these two examples is to demonstrate the two most common scenarios for a mortgage recast. Simply put, the benefit of the recast is that I can keep the same interest rate, pay extra towards principal, and lower my monthly payment.
What about the disadvantages of recasting my loan?
This is a topic you will not find in most other online articles about recasting. In fact, it is something that many mortgage loan officers in NJ may not want you to know. The ugly truth is that lenders LOVE when clients recast their loans. Why? The answer is simple! The independent mortgage broker near me makes more money by allowing clients to recast. How do they make more money? Two ways – they can collect more payments (by stretching your loan from either 27 years to 30 years, like in Example One), and they can collect more interest in total from you (this has to do with the amortization schedule calculation).
Let’s explore these two topics in more detail. In the first example, if the client did not recast their loan, and instead put $10,000 additional principal towards their mortgage and kept their monthly payment at $2,041, the client will save approximately $24,161 in interest (assuming they held the loan for 30 years).
In the second example, the client recast their loan only 3 months after the original loan was taken. In this case, the amount of extra interest paid by starting their loan back at 30 years cannot be directly calculated.
The closest calculation would be to compare the scenario of the client choosing $342,500 down payment at closing instead of 5% down payment ($42,500) at closing. In this case, the amount that they are paying extra in interest (by having the flexibility to buy before they sell) is approximately $13,800.
In both examples, recasting turns out to be a much more expensive option than if the client just put the extra funds towards principal and continued to pay their existing (higher) monthly mortgage payment each month.
Another question we often are asked is, should I recast or refinance? The answer depends on each person’s unique financial scenario. Some follow-up questions to consider are:
1. Will my new rate be higher or lower than my existing rate?
2. Will my new loan term be shorter or longer than if I recast my loan?
3. Do I want/need to recast or refinance for another reason besides lowering my monthly payment (such as getting cash-out or reducing the number of years to pay on my loan)?
4. What is the cost of the fees to refinance? (keeping in mind that recasting usually is free or costs a small administrative fee of $100)
The topic of recasting your loan can get pretty detailed, and your best option is to contact a mortgage broker near me to review your options.