Mortgage Recasting Qualifications and Availability These fluctuations may be helpful or detrimental to the borrower, so a mortgage recast may help lower monthly payments once a lump-sum payment is complete. The interest rate that a borrower is responsible for with an option ARM changes with the market. If the borrower gets into the habit of only paying interest on the mortgage, their loan balance will continue to increase instead of decrease over time.
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They can make full payments when their budgets allow or only pay interest if their income slows. This type of loan is attractive to buyers who may have unsteady financial situations. With an option ARM, the borrower has the option to make payments that include both principal and interest or to make payments that only address some of the interest charges. Option ARMs are adjustable-rate mortgages that have similar characteristics to negative amortization loans. Option Adjustable-Rate Mortgages (Option ARM) The borrower must be prepared for this recasting by learning what could trigger it and paying attention to the loan balance. In some cases, recasting occurs when certain thresholds are met, such as a specific loan balance. This recast may happen on a specific date that’s outlined in the mortgage. The borrower must provide a lump-sum payment to decrease the principal loan balance. Therefore, the only way to pay off the mortgage is by recasting it. Since the loan balance continues to grow, there’s no way for the borrower to pay it off within the loan term. As these smaller payments are made, the loan balance increases over time instead of decreasing. When this occurs, the interest is deferred and added to the loan balance. Negative amortization loans allow you to schedule a payment that’s less than the interest charge on the loan.
Two types of mortgages that generally include recasting terms are negative amortization loans and option adjustable-rate mortgages (Option ARMs). Your mortgage terms will outline whether your mortgage includes a recast or you can ask your lender about this option. The types of loans that may allow for recasting include: Department of Agriculture (USDA) loans aren’t eligible for mortgage recasting. Federal Housing Administration (FHA) loans, Veterans Administration (VA) home loans, and U.S. The lender calculates your new payments based on your current loan term and your lower loan balance.īefore you assume you can recast your loan, review the type of loan you have and if it qualifies you for recasting. While your loan balance is lower since you made a large payment toward it, your loan term doesn’t change. Your lender charges these fees because they must create the new amortization schedule for you and provide you with updated paperwork on your mortgage. These vary by lender but are usually a few hundred dollars on top of the lump sum you paid toward your loan balance. To recast your mortgage, you may also be responsible for recasting fees. However, you must have a good chunk of money available to pay down your mortgage before the new loan amortization schedule is created.
Your updated loan balance and the remaining loan term are taken into consideration when your new monthly mortgage payments are calculated. You must have made your lump-sum payment toward the loan balance by this date and the lender creates your new amortization schedule. If your mortgage includes a recast, there’s usually a set loan recasting date.
The loan terms you agreed to when you originally financed your home should outline any mortgage recast options you’re eligible for. Since your loan balance is lower, your monthly mortgage payments are also lower. Once you’ve completed this payment, your lender reconfigures the loan amortization schedule to calculate the remaining payments you must make on the mortgage. With a mortgage recast, you make a lump sum payment to pay down some of your loan balance. If your home mortgage terms include a mortgage recast option, you’ll benefit from lower monthly mortgage payments after your recast date. Credit Score and Credit Report Resources.
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