While many homeowners are familiar with refinancing their mortgage, not all homeowners understand loan recasts. This may be because not all lenders offer recasting or re-amortization, and not all borrowers are eligible. However, the process could save you money in two ways: lowering your monthly mortgage payment and allowing you to avoid the cost of refinancing.
A loan recast means that while your interest rate and term of your loan remain unchanged, your monthly mortgage payment is reduced to reflect your current actual loan balance. For example, if you have six years on a 30-year mortgage, you still have 24 years to pay it off once you have recast your loan. Lenders require an additional balloon payment to reduce your balance for the recast to work. The size of that extra payment affects how much you can save with a loan recast. Instead of reissuing, however, you could pay a lump sum on your existing loan, which would lower your balance but not reduce your monthly mortgage payment.
How loan recast works
Loan recasting may make sense if you inherit money (or get a big bonus at work) and want to apply it to your mortgage balance. Because you pay down your credit sooner than expected, you’ll ultimately pay less interest. This allows lenders to modify your loan or recalculate your monthly mortgage payment. Individual lenders have different requirements for loan recasts. For example, some lenders require a lump sum payment of $5,000 or 10% of the loan, whichever is greater, to reduce the balance before qualifying someone for a loan recast.
If you have a $400,000 mortgage at 4% interest over 30 years, your monthly principal and interest payments would be $1,910. If you pay off the loan over ten years, the remaining balance on your loan would be $1,910. 315, 136. A lump-sum payment of 10% of the remaining loan balance would be $31,554, bringing the balance to $283,582. In this case, the monthly payments would be reduced to $1,718. However, Keep in mind that while saving $200 a month on your mortgage payment is a worthwhile goal, you’ll also have spent a significant amount of cash to achieve that payment reduction.
Of course, lenders charge a small fee for loan recasts, often as low as $250.Determining Eligibility
Loan reissues are allowed on conventional Fannie Mae and Freddie Mac loans but not on FHA home loans or VA loans. Some lenders reformulate jumbo loans but consider them on a case-by-case basis.
To qualify for a loan recast, you must be current on your loan payments and have enough cash to pay off your principal balance. A credit check and appraisal are not required.
Advantages of loan consolidation
- Reduced payment. By recasting your loan, you can ease your cash flow without the expense of a home-refinance, which can require spending up to 6% of your loan balance. In fact, in some cases, what would be spent on the refinancing could be used to reduce your credit enough to qualify for a loan recast.
- An evaluation is not required. Unlike a home-refinance, a loan recast does not require an appraisal. If your home has fallen in value, you may not be eligible for a refinance, as most lenders will only refinance a home with at least 5% to 10% equity.
- No credit check is needed. Loan reviews generally do not require credit approval. If you have credit problems and can’t qualify for a refinance, you may still qualify for a loan recast.
In a specific case, loan recasting can be particularly beneficial. If you’re a homeowner who bought a new home before selling your current home, you may have to pay off two mortgages temporarily. Once you’ve sold your old home, you can use the proceeds from that home sale to pay down your loan balance and restructure your mortgage to make payments more affordable. Many homeowners deliberately plan to use loan recasts for this purpose when moving from one home to another. Just remember that you generally have to wait 90 days after your loan settles before you can reissue it.
Disadvantages of Loan Consolidation
Before you decide to restructure your loan, you’d be wise to evaluate it in the context of your overall financial plan. Some of the disadvantages of loan recasts include:
- Tie up the cash. If you have a lump sum of money, make sure paying your mortgage is the best use of that money. For example, if you have high-interest credit card debt, you need to pay it off first. If you don’t have an emergency savings fund or need to save money for other expenses, you’re probably better off not spending all of your money to pay off your mortgage.
- It does not reduce the term of the mortgage. It would help if you also considered loan recasts in the context of your retirement. Many older homeowners hope to pay off their mortgage before they retire. However, a loan recast will not shorten the term of your loan, although it may improve your cash flow. If your goal is to reduce your mortgage balance, switching to biweekly mortgage payments or making regular additional payments on your principal may be a better option than a loan recast.
- It does not reduce the interest rate. If you pay a high-interest rate, a refinance may be better. A lender can compare the costs and monthly payments on a refinance and loan recast to determine the best option for you.
Loan recasting isn’t for everyone, but if you have extra cash, check with your lender to see if this method of lowering your monthly payment is correct for you. If you are a homeowner selling one house and moving to another, you could benefit from a loan recast. Those who own a home with a reduced value or have credit problems may benefit more from a loan recast than from a refinance.