Mortgage Matters Q&A: What it means to recast your loan
There are multiple ways to lower your monthly mortgage payment. You may consider refinancing or recasting your loan. What is “recasting” and how is it any different than a refinance when both can lower your monthly mortgage payment?
Thanks to a call on the most recent airing of Mortgage Matters Radio, co-hosts and co-owners Dan Podesto and Jason Grote explained the process of recasting a loan, when it is appropriate, and how it is different from a standard refinance.
To begin with the basic scenario, when you get a loan it is most often paid off through fixed monthly payments, which don’t change over the years unless you refinance or recast your loan. Most home loans are traditional installment loans meaning you simply borrow money and pay it off over a negotiated period of time. A portion of each payment is repayment of your loan as well as part of your interest cost. Your monthly payment is based on a few inputs: loan balance, interest rate, and number of payments or time to repay the loan. Changing any one of those variables will result in a different payment.
So what is the difference between recasting a loan and refinancing a loan?
In both cases you ideally lower your monthly payment; however, they’re not the same.
When you refinance a loan you’re essentially paying it off by applying and qualifying for a new loan to pay the previous loan. In this way, your refinanced loan likely has a new interest rate and a lower balance than your original loan.
Recasting is slightly different in that you are not applying for an entirely new loan but modifying your existing loan. For example, if you were able to pay a large principle because of an inheritance or because you sold some assets, you can qualify for a lower monthly payment as a result of your lowered loan balance. In a mortgage recast the remaining scheduled principle and interest payments are recalculated based on a new amortization schedule.
Most don’t realize that they may have already had their loan recast, several times for that matter. When you hit the end of your fixed term, usually the rate will adjust once a year, every year that rate adjusts is technically a recast of your loan. Every year the 12 monthly payments will be at the new rate and recast the following year at the newest interest rate.
Most Fannie Mae or Freddie Mac loans are recast eligible; however, government loans like an FHA, VA, or USDA loan do not allow you to recast.
Curious if you qualify for a recast? Or, should you consider refinancing your loan? Give us a call as we are more than happy to answer your questions!
805-543-LOAN or 805-543-5626
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