The 411 on Mortgage Recasting - What It Is, How It Works and Who Can Qualify
It’s no secret that the real estate market is wild right now and it has been for the past few months.
Between lower than normal inventory numbers and fluctuating interest rates, you might wonder if jumping into the market as a buyer or seller is a good move.
And while I wish the answer to that question was a simple “yes” or “no”, that truly wouldn’t be very helpful for YOUR specific situation.
Here at The Real Estate Collective, we understand that the world of real estate has the potential to be a little confusing, especially when things are changing on a daily basis. Instead of you having to figure it all out on your own by scrolling through Google for answers to your burning questions, we’re here to make it easy for you!
At the end of the day, home ownership is a BIG deal and it’s something that everyone deserves to experience if they choose, which is why providing the education you need to make smart moves is the name of the game around here. 💃🏼
With the current state of the market, people are constantly asking questions like:
“Is now a good time to buy?!”
“Should I wait it out?”
“HOW do I even buy in this market?”
“Do I have options for financing?”
If you’ve asked one or more of those questions recently, you’re in the right place to get the information you need to confidently make the decision that’s best for you.
A few months ago on the blog, we talked about what I like to call The Home Buyer’s “Secret Weapon” in a High Interest Market, but what’s funny is that it’s not-so secret at all - we simply haven’t had to use these tools in quite a while!
The “secret weapon” I mentioned in that post was all about rate buy downs – these were a huge topic of conversation 2-3 months ago, but now you aren’t hearing many people speak of them. But I’m here to say, this is still a GREAT option.
Just the other day I had a buyer save over $600 on their monthly payment with a 2 year buy down, which is HUGE especially since we’re anticipating a rate decrease by next year!
Along with this buy down method, we also shared 4 Little to No Money Down Financing Options for Home Buyers in Montana – this is geared toward the person who is ready to buy, but wants to know their options.
Now, I want to dig deeper into another “secret weapon” that you might not know about and that is mortgage recasting!
What Is a Mortgage Recast?
Mortgage recasting is a process that allows homeowners to modify the terms of their mortgage loan without refinancing.
With a mortgage recast, you essentially make a large lump sum payment towards the principal balance of your mortgage, which leaves you with a lower monthly payment and a shorter loan term.
This option is commonly used with homeowners who have purchased a new home, but have yet to sell their previous home. Once they sell their previous property, they can use the funds of that sale to put toward their new mortgage with the recast option.
This is also a desirable choice for those who unexpectedly receive a large amount of money, whether that be through a bonus at work or an inheritance, and they want to use that money for their mortgage.
In today’s market, we are seeing more mortgage recasts due to the restructuring of conventional loan interest rates.
Since those who have a higher credit score and higher down payments can see a slight penalty, (I don’t make the rules 😅) people are looking for options to create a scenario that works in their favor and a mortgage recast is one way to do it!
Think of the mortgage recast as a way around the conventional loan restructuring - it just takes an extra step.
How a Mortgage Recast Works
Since a mortgage recast is different from refinancing, it’s important that you know how exactly this works!
Note: the specifics of the process can vary depending on your lender, but generally speaking a mortgage recast would look something like this ⬇️
First, you’ll connect with your lender to make your large lump sum payment, which typically is a minimum of $5,000-$10,000 OR a certain percentage of your principal balance.
This lump sum will go toward your loan’s principal balance and after the amount is applied, your lender will be able to recalculate your remaining loan amount, which will result in a lower monthly payment.
The key difference between this option and refinancing is that your interest rate doesn’t change! So, whatever your interest rate was at closing, that rate will remain the same after a recast.
In today’s market, this could look like lowering your initial down payment to receive a better interest rate (still eye rolling over this sentence) and then applying the rest of your planned down payment after closing in the recast. Thus getting you a better interest rate AND applying all of your down payment to lower the payment + mortgage insurance.
Overall, after a mortgage recast, you’re left with a lower monthly payment AND a shorter remaining loan term, which means you’ll be closer and closer to fully owning your home.🏡
How to Qualify For a Mortgage Recast
Now that you know what a mortgage recast is and how it works, you might be wondering if you qualify!
While a mortgage recast is a great tool for homeowners, there are a few caveats to be aware of and the main one is that not all lenders offer this option and not all types of mortgages are eligible.
This is why it’s super important to have a strong relationship with a real estate agent in your local area (if you’re local to Billings, MT, I’d love to connect with you!), so that they can help you navigate your specific situation!
Generally speaking, here are some qualifications so that you can determine if this option is something you could potentially use:
Loan Type
Mortgage recasting is typically available for conventional loans, including fixed-rate and adjustable-rate mortgages, but government-backed loans, such as FHA, USDA or VA loans aren’t usually eligible.
Minimum Lump Sum Payment
In order to use the mortgage recast option, you can expect to have a minimum lump sum payment requirement that you plan to apply towards the principal balance.
This amount will vary from lender to lender and could be dollar or percentage specific. Typically, we see this range from $5,000 - $10,000 minimum or be up to 10% of your remaining principal balance.
Minimum Waiting Period
If you recently purchased a new home, some lenders will require a certain waiting period before you can use the recast option.
This simply means that for a certain number of months you will pay your monthly mortgage based on the agreements at closing and then when your waiting period is over, you can work with your lender for a recast.
The reason this is typically required is so that lenders can make sure your account is in good standing and you are making payments on time. Once you have a history of this, it is easier for you to qualify for a recast!
Equity Requirements
Lastly, some lenders may require you to have a certain amount of equity built up before you can qualify for a recast. Similar to the minimum lump sum, this can be a specific dollar amount or a percentage of your principal balance.
Recasting VS. Refinancing
One of the most important things to consider when you want to adjust your home mortgage is whether recasting or refinancing is a better choice.
Here’s the thing: BOTH can be great options, but knowing which one is best for YOU is key!
Again, this where having a local realtor on your side is going to help you the most, but in general a few things to consider when deciding between recasting or refinancing are:
➡️ Interest Rate – if you’re happy with your interest rate, but simply want to lower your monthly payment, the recast is typically a great option!
If your current interest rate isn’t what you want to be stuck with for the life of your loan, refinancing might be a better fit.
➡️ Cost – both options cost money, so it’s really important to see which one would be most cost effective for you.
Refinancing is usually a more expensive option since it involves applications, appraisals, additional closing costs and more. However, sometimes the lower interest rate and lower monthly payment that you receive is worth it in the end.
➡️ Loan Term – recasting doesn’t extend your loan term, but rather shortens it due to the lower monthly payment.
With refinancing, you often have the opportunity to extend your loan term, so if that’s something that you specifically need, this may be a better choice.
➡️ Timing – as mentioned earlier, you sometimes have to wait a certain amount of time to qualify for a mortgage recast.
Refinancing, on the other hand, can be done at any time, so if you’re really wanting to make changes to your loan terms sooner rather than later, refinancing could be your best move.
And there you have it, friend - the 411 on mortgage recasting!
My forever motto that I will shout from the top of every mountain is that educated people make smart moves (literally 🏡) which is why this blog exists.
To recap, you learned what mortgage recasting is, how it works, who qualifies and the differences between recasting and refinancing.
Overall, when you know the options available to you, THAT is when you can confidently take action!
If you have more questions about mortgage recasting, I’m just a DM away – click here to connect! 💌
