Recasting or Re-Amortizing After Paying Lump Sum

QUICK ASIDE: NEED FOR SPEED REQUIRES COOPERATIVE ESCROW OFFICERS 😊

A frequent cause of delays for us is slow escrow officers who sometimes get openly hostile when we request info or documents in a timely (under 24 hours) manner. This is a quick reminder that we need escrow officers who are fully committed to speed – if we want to close quickly.

REFI OR RECAST?

We often get inquiries from borrowers who come into lump sums of money (usually from inheritances or stock option payouts), and they want to pay down their loan to either pay it off much faster or to lower their payment.

If they have a relatively high rate (over 3.25% in today’s environment), we will often suggest just doing a no-cost refi, depending on the desired loan amount. If, however, they have a low rate (under 3.25%), we will encourage them to approach their servicer to request a “recast” IF the option is available.

WHAT IS A MORTGAGE RECAST?

A mortgage recast is simply a re-amortization of one’s mortgage after paying down a large portion of the principal balance.

Example: Borrower has a $500,000 loan at 3.0% with a mortgage payment of $2,108 and 25 years left on the loan.

If the borrower pays down the loan by $200,000 but does not recast, her payment will remain the same.

BUT – she will pay off her loan in a little over 10 years if she keeps making the same payment.

If she does recast, her payment will be calculated over 25 years and go down to only $1,422.

It is important to remember that the remaining term of the loan remains the same when loans recast, so payments don’t go down as much as people might hope in some cases.

WHO IS ELIGIBLE FOR A RECAST?

  1. FHA & VA borrowers are not eligible.
  2. Conforming (Fannie and Freddie) borrowers are usually eligible, depending on the servicer.
  3. Jumbo borrowers are eligible about 50% of the time, depending on the servicer and on who holds the mortgage.

Borrowers need to contact their servicers to inquire about their recasting eligibility.

FEES AND MINIMUM PAYMENTS

There are usually fees ($250 to $500) and minimum payment amounts ($5,000 to $10,000) required for a recast. The process itself can take up to 60 days.

ADVANTAGES & DISADVANTAGES

The biggest benefit from a recast is the ability to lower one’s mortgage payment while retaining a low interest rate.

The disadvantage of a recast has to do with the lump sum payment itself, as borrowers are giving up a significant chunk of liquidity that might be better invested elsewhere or retained for “rainy day” funds.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167

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