Recasting or Re-Amortizing a Mortgage – Misconceptions & No Guarantees!

Now that our bridge loans are becoming so popular, we are having a lot of conversations with borrowers about recasting.

Recasting = Re-amortization of Mortgage After a Lump Sum Paydown of Principal.

Our borrowers are taking bridge loans so they can buy another home before they sell their current home or “departing residence.”

Our borrowers then intend to pay down their mortgages significantly after their departing residences sell – with the hope of recasting their mortgage too.

In light of that, I wanted to repeat a portion of a blog I wrote a few years ago (when rates were a bit lower ??) setting out some issues and misconceptions when it comes to recasting.

Bob Wants To Recast

Most lenders allow borrowers to recast or re-amortize their mortgages when they pay down their principal balance.

For example, Bob might have a $600,000 mortgage at 3.5% with payments of $2,694 per month, with 27 years remaining.

If Bob’s grandma dies, or Bob wins the lottery, or Bob’s company IPOs, or Bob wins a lawsuit, or Bob robs a bank, Bob might then have an extra $200,000 he wants to use to pay his mortgage down.

If Bob just pays his mortgage down to $400,000 and says nothing to his servicer, his payment will remain $2,694 per month (and Bob will think WTF? Why did I pay down my mortgage?).

BUT – if Bob has his mortgage recast, his payment will drop to $1,910 per month – $400,000 at 3.5% over 27 years – and Bob will be very happy.

If borrowers want to recast, they need to contact their servicer to inquire about the procedure and be prepared to pay a fee, usually in the $300 to $400 range.

Recasting Problems

1. Some Servicers Don’t Allow It. Some servicers don’t accommodate recasting and many mortgage banks who sell their servicing rights cannot guarantee which servicer a borrower will end up with. Hence, we cannot always guarantee that borrowers can re-cast.
2. Some Investors Don’t Allow It. Some investors (who buy loans from mortgage banks) don’t allow for recasting, particularly jumbo investors who service their own loans.
3. Recasting Too Soon Can Result In Early Pay Off Penalties. If a borrower pays down her loan more than a certain percentage, e.g. 20%, within six months of funding, the mortgage bank that funded that loan can face significant “early pay off” penalties. This is often an issue for us when a buyer wants to buy a new home before selling her old home – with the intention of selling the old home, after buying the new home, and using the net proceeds to pay down the new loan within six months.

My main point though is that lenders cannot guarantee that borrowers will have the ability to recast.

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