Should you recast your mortgage?

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First, what does that even mean? What is a recast mortgage?

Recasting a mortgage is the process of paying a lump sum of your principal in order to reduce your monthly payments. It is simply a process by which your loan is re-amortized based on a lower principal balance.

Unlike a refinance, it doesn’t change your interest rate nor does it re-set the number of months/years left on your mortgage loan.

Recasting is rarely done, but it is worth considering under certain circumstances.

When would you consider recasting?

When you suddenly have a windfall, such as an inheritance or a large bonus at work, and you’d prefer to reduce your monthly payments instead of spending it or investing it elsewhere.

You could simply apply the money to your mortgage. That would reduce the principal balance, causing less of each monthly payment to go toward interest and more toward the principal. It would also shorten the life of the loan, saving you even more on interest. However, your monthly payments would remain the same.

You could also refinance for a lower amount.

Note that only conventional loans are eligible for recasting. Government-backed loans such as FHA and VA cannot be recast. Additionally, not all banks offer this service. And finally, most lenders require a minimum of $5,000.

What’s the difference between recasting and refinancing.

Refinancing is taking out a new loan to pay off the old loan. As such, it generally requires the same steps as any other mortgage loan. That includes a credit check, appraisal, and payment of various fees. The cost of refinancing could be as much as $4,500.

Recasting is much simpler, and cheaper. You simply contact your bank, pay a fee of about $250 – $300, and hand over the money. There’s no credit check and no appraisal.

Interest rates are another difference.

When you refinance, you’ll do so at the going interest rate on the date of your refinance. Refinancing makes sense if you plan to stay in the house for the next several years, and if interest rates are significantly lower than they were when you took out the loan. If they’re higher, it does not.

When you recast, you keep the same interest rate you had when you took out the original loan. If rates are higher now, it makes more sense to recast than to refinance.

If you think recasting might be a good idea for you, contact your lender to learn how much you’ll save per month.

If you’d rather refinance, get in touch with us. We’re the Mike Clover Group at Homewood Mortgage, and we’d love to assist you!

Call us today at 800-223-7409

 

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