Can You Recast a VA Loan? Everything You Need to Know

If you currently have a VA mortgage loan you may be wondering if it’s possible to recast your loan. Recasting a mortgage involves making a lump sum payment toward the principal balance and having the lender re-amortize the loan to lower your monthly payments. This can be an appealing option for borrowers looking to reduce their payments while keeping the same loan term and interest rate. However, when it comes to VA loans, recasting is not an option.

In this article, we’ll explain what loan recasting is, why VA loans can’t be recast, and useful alternatives for VA borrowers to consider.

What Is Mortgage Loan Recasting?

Let’s start with a quick overview of what loan recasting is and how it works with conventional mortgages.

A mortgage recast, also known as a loan reamortization, allows borrowers to adjust their monthly mortgage payment amount by making a large lump sum payment toward their principal balance. This lump sum payment goes directly toward paying down the loan’s principal.

Once the payment is made, the lender recalculates or “recasts” the loan’s amortization schedule based on the reduced principal balance This recasting process lowers the monthly mortgage payments over the remaining life of the loan term without changing the interest rate or term length.

For example, let’s say you have a $200,000 30-year mortgage at 5% interest. By making a $50,000 lump sum payment and recasting the loan, your principal balance would decrease to $150,000. The lender would then recalculate your payments based on the new loan balance, which could reduce your monthly payments by a few hundred dollars.

The main benefits of recasting a mortgage include:

• Lower monthly mortgage payments
• Pay off your loan faster by reducing the principal
• Save money on interest charges over the loan term

Overall, mortgage recasting allows borrowers to reduce their payments and interest costs without refinancing or taking out a new loan. Many borrowers pursue recasting when they come into extra cash like an inheritance or bonus at work.

Why You Can’t Recast a VA Mortgage

Now that we’ve explained the basics of recasting, let’s look at why it isn’t possible with VA loans.

The VA currently does not permit loan recasting for VA mortgages. This policy applies to all VA home loans including:

• VA Purchase Loans
• VA Refinance Loans
• VA Streamline Refinance Loans

Government-backed mortgages through the VA, FHA, and USDA programs do not allow recasting. This differs from conventional loans offered by private lenders, which often can be recast.

The main reason recasting is not available with VA loans likely relates to how the mortgage insurance works. The VA charges an upfront funding fee and ongoing monthly premiums to provide borrowers with mortgage insurance. Recasting could impact the insurance coverage amounts over the life of the loan.

Overall, the inability to recast a VA mortgage is one potential disadvantage compared to conventional loan programs. However, VA loans offer many other unique benefits that often outweigh this limitation for eligible borrowers.

3 Alternatives for VA Borrowers

While you can’t recast a VA home loan, there are a few alternatives VA borrowers can consider to lower their mortgage payments or pay off their loans faster:

1. Paying Down the Principal

One of the best features of VA loans is that they don’t have any prepayment penalties. This means you’re free to make extra principal payments toward your mortgage without facing any penalties.

While paying down your principal won’t lead to lower monthly payments like recasting, it allows you to chip away at your overall mortgage balance. This can help you build equity and pay off your loan sooner.

For VA borrowers with extra cash on hand, making principal-only payments is one of the closest options to mimicking the benefits of recasting. Talk to your servicer to learn how to properly direct extra payments toward your principal balance.

2. Refinancing Your VA Loan

Another alternative is refinancing your current VA mortgage into a new loan. VA refinancing lets you take advantage of better terms by swapping out your existing VA loan for a new one.

Refinancing through a VA streamline lets you lower your interest rate and monthly payment without a full application process. Or you could cash-out refinance and tap your home’s equity for large projects.

While refinancing comes with upfront closing costs, you’ll likely recoup those expenses over time through the interest savings from your new loan.

3. Loan Modification

If you’re struggling to make your payments, loan modification could make your VA mortgage more affordable. Loan modification adjusts the terms of your loan to make it easier to repay.

Modifications can extend the repayment term, reduce the interest rate, or even reduce the principal balance owed in certain cases. Check if you qualify for a VA loan mod before looking at options like forbearance that are harder to recover from.

Key Takeaways on Recasting VA Loans

Recasting is not an option for VA mortgages, but alternatives do exist:

• VA loans cannot be recast like conventional mortgages can. The VA program does not permit reamortization.

• Making extra principal payments allows you to pay down your mortgage faster without penalties.

• Refinancing lets you swap your current VA loan for a new one with better terms.

• Loan modification could make your payments more affordable if you’re struggling financially.

While being unable to recast is a disadvantage for VA loans, the program offers borrowers many other unique benefits. Be sure to explore all your options if you want to lower your mortgage payments or pay off your VA loan faster.