Mortgage Recast: Alternative to Refinancing

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A mortgage recast is when a mortgage lender recalculates the loan payments by changing a variable in the loan. This can be used when a borrower is facing financial difficulty. With a traditional loan, the lender amortizes the amount of money that is borrowed over 360 months. This provides you with a specific monthly payment for the life of the loan. If one of the variables of the loan changes, this can also drastically affect the monthly payment. With a mortgage recast, the lender is going to recalculate the loan based on new variables. They might lower the interest rate or extend the repayment period. The loan changes will lower the monthly payment for the borrower.

How to Use It

In order to gain access to a mortgage recast, you are going to need to talk to your lender. In most cases, you are going to have to prove that you have some type of financial difficulty that you need help with. At that point, the lender may agree to go through a mortgage recast with you. With this process, you are also going to have to agree to give up some of the equity in your home. At that point, you are essentially going to have a smaller loan, and a smaller payment to go with it. 

Advantages Over Refinance

A recast is very similar to refinancing your existing mortgage, however, there are a few key differences. With a mortgage recast, you are going to be working with the same lender throughout the process. With a refinance, you could potentially shop around and get a mortgage from another lender.

Also, a mortgage recast is not set up to go through a new closing process. This means that there are not going to be closing costs that you will have to come up with. With a refinance, you are going to have to pay thousands of dollars in closing costs in most cases.

A refinance, will require a new loan that is typically for another 30 years. With a mortgage recast, you may not have to extend the loan that far. They might just add another 10 to 15 years on to the existing term of the loan. 

Option ARM

A mortgage recast is not always used when an individual is in financial trouble to help them out. In some cases, it can end up making your payment higher. This is common with a negative amortization loans, such as an option ARM. With an option ARM, the lender is going to recalculate the loan payment at a certain point in the loan so that the principal will be repaid.

Even though the payments may be higher on an Option ARM, it may be a good idea to recast it because you will stop building up negative equity. Or, in other words, you will stop the process of making your loan balance larger.