Learn more about the potential benefits and pitfalls of mortgage recasting in today’s high inflation climate.
What is Mortgage Recasting?
Mortgage recasting is when your financial institution recalculates the monthly payments on a current mortgage loan based upon the remaining balance after additional or lump sum payments have been made. This could decrease the total monthly payment of your mortgage without changing your interest rate or loan term. Some lenders, but not all, offer recasting as a way to make their financial institution an attractive choice for home buyers.
Why Would I Recast My Mortgage?
In the event that a current homeowner was looking to purchase a new home, it may be very desirable to ensure that your financial institution will allow a recasting of your mortgage. This will allow you to enter into an agreement for your new mortgage before ever selling your current home.
Then, when the previous home is sold and you have received your equity from that sale, you could turn around and pay down your mortgage. A recast would lower the monthly payment and could greatly reduce the total amount interest paid over the life of the loan. Unlike a refinance, you would keep the original mortgage in every way, except for the total monthly payment and how much of that payment would be going to interest (instead of principal) each month. This is especially beneficial if the interest rates have gone up since you procured your new mortgage.
Just Make Sure the Recasting is In the Contract
As we mentioned above, not all mortgage lenders will allow for mortgage recasting. A true story from one of our clients goes like this. The client entered into a new mortgage with written (email) documentation from their financial institution that they would be allowed to recast the mortgage as soon as their current home was sold. After asking multiple times if recasting was going to be available, our client signed the paperwork and moved into a new home.
After the sale of this client’s previous home was completed, this individual contacted the lender to pay a lump sum and recast the mortgage. In the interim, the financial institution had sold this loan to a different lender. This actually happens quite often. The new lender absolutely would not recast the mortgage. Although the information about the recasting is in writing, it is not in the contract, and therefore the new lender is not legally required to honor that request. This individual homeowner was then left paying a monthly payment that was very high amidst the rapidly increasing costs of gas, groceries, and goods.
Review Your Mortgage Contract Before Signing
We know contracts can be long and daunting, but we would always recommend making sure you know what is inside that lending contract. A mortgage is a very large, very long term commitment. We are estate planning attorneys, however we don’t provide legal advice on this blog. We recommend reviewing your contracts in advance of closing, and consulting your trusted legal advisor to ensure that your legal “bases” are covered long before you sign on the dotted line.
To listen to our full podcast about mortgage recasting click here.