Loan Recasting: Is It For You?

Pete Green of Atlantic Bay Mortgage Group shared this information about loan recasting. Here’s what he had to say…

senior couple with bundles of money

If you are looking to reduce your monthly mortgage payments, Loan Recasting is a refinance alternative that is an excellent option for retirees whose mortgage is more than they ultimately wanted.

The process is as follows: Loan Recasting typically requires you to pay a lump sum toward the principal balance on your mortgage. The borrower then requests that the lender “recast the note” for a new lower balance. The monthly payment is also recalculated on the new lower principle balance, thus lowering your monthly mortgage payment. Loan Recasting typically costs $350 versus $4,000 in closing costs for a refinance.  A Loan recast is generally allowed only after 90 days or more of timely mortgage payments. It will maintain your current interest rate, where a refinance will not. If you’re just looking to shorten your mortgage term, a recast is NOT the best option.

Here’s An Example:

A Borrower purchased a new Delaware home 6 months ago. Now just having sold their home in NJ, the Borrower wishes to apply the proceeds to their current mortgage and move to Delaware!

  • Original mortgage amount $400,000
  • Original Principal & Interest $1,936/mo.
  • Borrower has proceeds of $150,000 to apply to the mortgage principal
  • New mortgage amount will be $250,000 after the Recast
  • New Principal & Interest payment after recasting will be $1,212/month, a savings of $724/month!

Top Reasons To Consider A Loan Recast

  1. Reduce Your Monthly Mortgage Payments: Some borrowers then continue to make their previous mortgage payments and pay off their home loan even faster. Others use the additional cash flow to invest, pay off other debt or save for other purposes.
  2. Lower The Payment of Your New Home After Your Old One Sells: This is a valuable option when you buy a new home before your current home sells. If you qualified for the mortgage on your new home while still paying for your previous home, a loan recast made with the proceeds of your previous home makes sense.
  3. You’ve Got Credit Issues: For those who cannot refinance because of credit issues or low home equity, a recast may be a good option. You will not be applying for a new loan. Your interest rate and your loan term will stay the same. The only difference is that your monthly mortgage payments will be lower.

Does Your Loan Qualify?

For the most part, only conforming Fannie Mae or Freddie Mac conventional loans are eligible. In some cases, jumbo loans can be recast, but the decision depends on the loan and the lender. No matter what, your loan must be in good standing to move forward.

The Disadvantages

  1. There May Be Better Uses For Your Cash: You will be required to make a lump sum payment, and some financial planners feel there are better uses for cash than paying down your mortgage. If you lack an emergency savings account, have credit card debt or have underfunded your retirement savings, you may be better off using cash for those purposes
  2. Your Interest Rate Won’t Change: A re-amortization will not reduce your interest rate. When mortgage rates are low, you may be better off refinancing, even with closing costs. Some borrowers choose to refinance first, then re-amortize within a year or less to reap the benefits of both financial options.

The Bottom Line

If your goal is to pay off your mortgage faster, you can simply choose to pay extra toward the principal every month, make bi-weekly mortgage payments or make an extra payment each year in order to reduce the amount you will pay in interest over the life of the loan.

Pete Green MortgageFor more information, or of you have questions about Loan Recasting, contact Pete Green of Atlantic Bay Mortgage Group. Pete can be reached at 302-227-5522 or via email at petegreen@atlanticbay.com. Atlantic Bay Mortgage Group is located at 19716 Sea Air Ave, Suite 3 in Rehoboth Beach.