Mortgage Recast: How it can help you buy a new home before selling yours

Buying a new home when you already own a home presents certain challenges. You can make an offer on a new home contingent on the sale of your current home, but some sellers may be reluctant to accept a contingency. For others, the challenges are just as much logistical as they are financial. Getting a home ready to sell while living in it (especially with kids and pets) can be difficult. If you are a current homeowner and are looking to buy a new home without having to sell yours first, a mortgage recast might be your solution.

What is a Mortgage Recast?

A mortgage recast allows you to reduce your monthly mortgage payment after a principal reduction of $10,000 or more. After applying the additional funds to the principal balance of your loan, your loan servicer will re-amortize the new balance of the remaining years of your loan.

A recast does not change your interest rate. Your new monthly payment is calculated at your note rate from closing. In order to reduce your interest rate, you would need to refinance.

How does a Mortgage Recast help you buy without selling first?

Most current homeowners looking to move intend to use at least a portion of the current home's equity as a down payment on the new home. Borrowing less on the new home helps offset higher interest rates from a monthly payment standpoint, especially if the current home has a mortgage with a crazy low rate from 2020-2021. So how can you use that equity if we buy before we sell?

Assuming you qualify for a new mortgage without having to sell your current home, you can make a minimal down payment (typically 5%) on the new home in order to purchase it before selling. You will need to be able to access the down payment funds from available funds, such as checking, savings, investment or retirement accounts. Family gifts can also be used for down payment. You will start off with a higher than intended mortgage payment but it will be temporary until your home is sold.

Once your current home is sold, you can apply the equity from the sale of your home to the loan balance on your new home and use a recast to lower your payment. A few extra steps, but your mortgage payment is now where it would have been had you sold before buying.

Which types of loans allow Mortgage Recasting?

Conventional loans allow for recasting.

Government insured loans such as FHA, VA, and USDA do not allow for recasting.

How much does a Mortgage Recast cost?

Most loan servicers will charge a recast fee of $200-300.

When can you recast?

Most loan servicers will require that you wait 90 days from your closing date before recasting. This allows time to get the loan set up before making changes to the balance and payment. After this initial waiting period, you can recast any time you are making a principal reduction of $10,000 or more.

When happens if you don't elect to recast after making a principal reduction?

If you make a principal reduction and do not elect to recast, then you have simply prepaid your loan and reduced your effective term. The amount of your payment will remain the same, but your principal portion of the payment will now be greater as a result of the prepayment.

How can I help you?

When it comes time to purchase a home or refinance an existing loan, I want to help you! Hopefully articles like this give you good information and a better understanding of the mortgage world, but let me use my experience and expertise to help you with your particular situation.

I tell my clients and referral partners that a mortgage transaction starts with a simple conversation. Let’s talk about your financial situation, budget, and goals so that I can help you determine the best solution for you. During a 10-minute informal conversation, we can get you on the right path as it relates to a home purchase or mortgage refinance.