I get this question quite often from clients who would like to make a lump sum payment and reduce their mortgage payment without going through a full refinance. Check with your servicer to find out if they offer this feature in your loan or if you are contemplating a purchase or new refinance, it is a good question to field before you choose a lender for your transaction. The feature initially discussed is a courtesy offered by your servicer and not all lenders or servicers allow for recasting. Prepayment without penalty is allowed on most loan products and a review of your loan documents at closing is important.
Recasting is the process whereby a borrower applies a significant one-time payment to substantially reduce the unpaid principal balance of the loan in order to lower the monthly payment. Although the remaining loan term and interest rate remain unchanged, re-amortizing the loan based on the newly reduced principal amount results in a lower monthly payment. Conventional, conforming Fannie Mae and Freddie Mac loans are generally eligible, but loan recasts are not allowed on FHA and VA loans. Recasting a jumbo loan depends on the individual loan.
Different lenders will require a different minimum principal curtailment. Typically, the minimum is $5,000 or even $10,000. There will be a nominal one time fee ranging from $100-$500 also. The interest rate on the loan will not change and the re-amortization will be over the remaining original term of the loan. The loan will be re-amortized based on the newly reduced principal amount, resulting in a decreased Principal and Interest (P&I) payment and an overall lower monthly payment. New billing statements will be adjusted to reflect the lower payment amount.
This is a good alternative to a refinance when you have a more favorable interest rate than what the current market is offering. Also, there are no typical refinance closing costs related to the re-amortized loan process.
On the other side of this scenario, is a lump sum payment keeping the P & I payment the same and the term of the loan will then be shortened. This is a typical pre-payment. It obviously will depend on your long term reasons for opting for either type of loan restructure and you should consult your financial professional and your mortgage professional for guidance.