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This article is part of a 3-part series on mortgage recast strategies. Read each part below to better understand how mortgage recasting works and when it may be the right financial move for your situation.
Understanding the mechanics of a mortgage recast is much easier when you see how the strategy could work in a real-life scenario.
Imagine you’re a homeowner in Port Orchard who has built significant equity in your current home and is ready to move into a larger home in Bremerton, Silverdale, or another community within Kitsap County.
You’ve found the perfect home, but your current home hasn’t sold yet.
Like many move-up buyers, most of your available cash is tied up in your existing home’s equity. While you know those funds will become available once your current home sells, you don’t want to miss the opportunity to purchase your next home.
Rather than delaying your purchase or making your offer contingent upon selling your current home, you explore whether purchasing first and requesting a mortgage recast after your existing home sells may be a better strategy.
Although every borrower’s financial situation is different, the following example demonstrates how the process may work.
Because the proceeds from your current home haven’t yet become available, you decide to make a smaller initial down payment while preserving the flexibility to purchase the new home immediately.
Doing so allows you to submit a non-contingent offer rather than waiting for your existing home to sell.
Several weeks later, your previous home closes.
After paying off the existing mortgage and other selling expenses, you receive approximately $330,000 in net proceeds.
You decide to apply $250,000 directly toward the principal balance of your new mortgage.
This additional payment is commonly referred to as a principal curtailment.
A principal curtailment is simply an additional payment made directly toward your mortgage principal.
Unlike your regular monthly mortgage payment—which typically includes principal, interest, property taxes, homeowners insurance, and possibly mortgage insurance—a principal curtailment immediately reduces the outstanding balance owed on your mortgage.
Because interest is calculated using your remaining principal balance, reducing that balance may lower the amount of interest paid over the life of the loan.
When used as part of a mortgage recast strategy, a substantial principal curtailment serves two important purposes.
First, it significantly reduces the amount of money you’re financing.
Second, it provides the basis for your loan servicer to recalculate your monthly principal and interest payment using the lower loan balance.
Once your principal payment has been applied, the next step is contacting your loan servicer to request a mortgage recast.
The servicer will generally review several items before approving the request, including:
If the request is approved, the servicer re-amortizes your remaining loan balance over the existing loan term.
One of the biggest advantages of this process is what doesn’t change.
You continue to keep:
The only significant change is that your future monthly principal and interest payments are calculated using the lower outstanding balance.
For homeowners who already have an attractive mortgage rate, this can be an effective way to reduce monthly housing expenses without refinancing.
Many buyers initially focus on lowering their monthly payment after a mortgage recast.
However, another potential benefit is often overlooked.
Homebuyers who purchase with less than a 20% down payment on a conventional mortgage are generally required to pay Private Mortgage Insurance (PMI).
Without making a substantial principal payment, some homeowners may continue paying PMI while waiting for their regular mortgage payments and future home appreciation to increase their equity position.
A large principal curtailment after selling your previous home may help you reach your servicer’s loan-to-value requirements for PMI cancellation much sooner than relying on appreciation alone.
It’s important to remember, however, that reaching the required equity position does not automatically remove PMI.
PMI cancellation remains subject to your loan servicer’s eligibility requirements, including payment history and any valuation requirements that may apply.
One of the most common misconceptions about mortgage recasts is that they automatically eliminate PMI.
They do not.
Although both requests may occur around the same time, they are handled separately by your loan servicer.
A mortgage recast recalculates your monthly principal and interest payment after a substantial principal reduction.
A PMI cancellation request asks your servicer to review whether you’ve satisfied the applicable requirements to discontinue Private Mortgage Insurance.
Understanding the distinction between these two requests can help homeowners avoid unnecessary delays.
If your principal curtailment is expected to reduce your loan-to-value ratio enough to satisfy your servicer’s PMI cancellation requirements, consider asking your servicer about beginning both processes during the same phone call.
Although the mortgage recast and PMI cancellation review remain separate servicing requests, initiating them together may help reduce unnecessary delays that could occur if you wait weeks or months before requesting PMI cancellation.
Every servicer has its own procedures, documentation requirements, and processing timelines, so ask what information is needed for each request and whether any additional steps are required.
A short conversation today could potentially help you avoid paying unnecessary PMI while waiting to begin a second review.
Now let’s look beyond the mortgage itself.
Imagine two buyers submit nearly identical offers on the same home.
Buyer A must sell their current home before purchasing.
Buyer B has already secured financing and can close regardless of whether their existing home has sold.
Assuming all other terms are equal, many sellers are likely to view Buyer B’s offer as presenting less overall risk.
That’s one reason many move-up buyers explore financing strategies that allow them to purchase before selling.
A mortgage recast can become an important part of that overall strategy by helping reduce monthly payments after the previous home has sold.
A mortgage recast may be worth considering if you:
As with any financing decision, it’s important to discuss your goals with an experienced mortgage professional before deciding which strategy best fits your situation.
A principal curtailment is a lump-sum payment made directly toward the principal balance of your mortgage. It reduces the amount you owe and may lower the total interest paid over the life of the loan.
No. A mortgage recast and a PMI cancellation request are two separate servicing processes. If you believe your principal payment qualifies you for PMI cancellation, you’ll need to request that review separately.
If your principal payment is expected to satisfy your servicer’s PMI cancellation requirements, consider asking about both requests during the same conversation. Although they are processed separately, beginning both reviews together may help reduce unnecessary delays.
Yes, many homeowners use proceeds from selling their previous home to make a substantial principal payment before requesting a mortgage recast, provided their loan and servicer allow recasting.
Not necessarily. Every borrower’s situation is different. A bridge loan provides access to equity before your home sells, while a mortgage recast uses proceeds after the sale to reduce your monthly payment. Your loan officer can help you compare the costs and benefits of each option.
Whether you’re buying a home or ready to refinance, our professionals can help.
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