Loan Recasting: A Smarter Alternative to Refinancing Your Mortgage?
If you're seeking an alternative to refinancing that still allows for a reduction in your monthly mortgage payment, the answer is a resounding "Yes!". A better solution exists: a loan recast.
So, what exactly is a loan recast (aka re-amortization)?
A loan recast is a re-amortization of your mortgage based on the current loan balance, maintaining the same rate and terms of your existing loan. This means that your loan is recalculated based on the remaining balance, effectively lowering your monthly payments while keeping your interest rate and loan term unchanged. To qualify for a loan recast, most lenders require a lump sum payment to reduce the principal, along with a nominal fee. The minimum lump sum payment is typically around $5,000 or 10% of the remaining loan balance, although rules can vary by lender.
What are the benefits of loan recasting?
Loan recasting allows you to lower your monthly mortgage payment without incurring the high costs associated with refinancing, which can reach up to 6% of your loan balance. The closing costs you would otherwise pay for a new loan refinance can instead be used to reduce your principal and lower interest costs. This means that the money you would have spent on refinancing fees can instead be used to directly reduce your loan balance, resulting in lower monthly payments and less interest paid over the life of the loan. Furthermore, recasting doesn't require a credit report or property appraisal, simplifying the process and saving you additional costs and time. For instance, let's say you've owned your home for two years with a starting balance of $200K and a 4.5% interest rate. On a 30-year mortgage, the monthly payment is $1,013.37. After two years, you'd have paid $6,601.13 towards your principal. A 10% lump sum payment contribution ($19,339) towards your loan recast would lower your mortgage payment to $912.03. Over 30 years, you would save $48,630 in interest.
Over the years, we have found loan recasting to be an immensely beneficial strategy in managing my mortgage. Every two to three years, we've made use of the option to recast my loan, which has not only helped us to pay off our mortgage at a significantly faster pace but also to improve my cash flow. By making lump sum payments towards the principal, We've been able to continually reduce my monthly mortgage payments. This reduction in monthly commitment has freed up cash for other investments and expenses, thus improving our overall financial flexibility. It's worth noting that this strategy requires discipline to save or invest the surplus money rather than increasing spending. The journey towards full home ownership can be a long one, but by using the tool of loan recasting, we've been able to make meaningful strides towards that goal while maintaining financial comfort.
What are the drawbacks of loan recasting?
Recasting can tie up a significant sum of cash in your equity. These funds might be more beneficial if used to reduce high-interest credit card debt. One smart option to regain access to your funds is to open an equity line of credit. This allows you to borrow against the equity in your home, providing you with a safety net of available funds. Additionally, government programs such as FHA or VA don't qualify for recasting. This means that if your loan is backed by these government programs, you won't be able to take advantage of loan recasting. Also, recasting won't allow you to secure a lower interest rate or shorten any years off your loan. If interest rates have dropped significantly since you took out your loan, or if you're looking to pay off your loan faster, refinancing might be a better option.
The Bottom Line
A loan recast could be a savvy financial move for your situation. For those interested in accelerating the mortgage payoff process, recasting is an effective strategy to improve your net cash flow and apply the surplus funds to the mortgage principal. Ultimately, you could significantly increase your equity and save thousands of dollars in interest payments. By understanding the ins and outs of loan recasting, you can make an informed decision that best suits your financial needs.