What does it mean to recast a loan?
The most popular application for this technique is with a mortgage loan. Most mortgages have very large principles and long payout timelines. This, paired with steep interest rates, can contribute to years and years of high monthly payments, washing away your plans to save up for that next trip to Disney World. This is where recasting your mortgage may be beneficial. Essentially, recasting a loan is paying a single lump sum of money, in order to reduce the principle amount left on the loan. This will not alter the length of the loan; however, it will decrease the amount paid on each monthly payment for the remainder of the loan and lessen the amount of interest paid overall. “When recasting a loan, the lender will re-amortize your monthly payments. This means that in the remaining months your payments will decrease and less interest will be paid over the life of the loan.” explains Steven Clifford, a loan officer from Flat Branch Home Loans.
For example:
Marcus found his dream home for $225,000. His mortgage would be extended over a 30-year time period, and he paid a 20% down payment making his actual loan amount $180,000. He would be paying near $1300 dollars per month at a 5% interest rate.
Now let’s say a few years down the road Marcus receives a large raise in his firm and is able to save up $20,000 dollars to put towards his home loan. He calls up his lender to make sure they offer loan recasting and then goes to the bank.
At the bank he will pay a small fee and put the $20,000 towards his mortgage. Now the lender “recasts” his payments for the remainder of the term, as if his down payment was originally $65,000. Due to Marcus’s principal being lowered, the amount of interest per payment has also lessened. He now only pays close to $1,000 per month.
