How mortgage repayment works and how it can save you money
Homeowners who want to shave dollars from their monthly mortgage payment, as well as save money on interest, could consider a mortgage reimbursement.
What is mortgage reimbursement?
A recast of the loan, or recast the loan, is when a borrower makes a large lump sum payment towards the principal balance of the loan and the lender, in turn, reorganizes the loan. This means that your loan is reduced to reflect the new balance.
The recast reduces the monthly payments and the amount of interest you will pay during the term of the loan. However, it does not affect the interest rate or the terms of the loan. In this way, the mortgage reimbursement offers two - and perhaps three - attractive benefits for homeowners with some extra money in their pockets to pay the balance:
Lower monthly payments
Less interest paid during the loan term
If you have a low interest rate, it will remain the same. (Conversely, if your interest rate is high, the recast will not help.)
How the mortgage recast works
In order to repay the loan, borrowers must make a lump sum payment to the principal of the loan. Lenders usually require $ 5,000 or more to repay a mortgage. The remaining balance is then written off to reduce monthly payments. There are usually commissions associated with the recast. The commissions vary depending on the lender, but generally do not exceed hundreds of dollars.
The recast involves not only lower monthly payments, but also the borrowers will pay less interest for the entire duration of the loan. For example, if your 30-year mortgage carries a principal balance of $ 200,000 with an interest rate of 5%, you could pay $ 1,200 a month. If you spend $ 50,000 to repay your mortgage, plus a $ 250 recast fee, you'll end up saving almost $ 35,000 in interest payments and around $ 300 a month in monthly mortgage payments. Of course, the money you sink into the house during the recast will not be available for investment or other purposes.
Keep in mind that the recast does not reduce the duration of your mortgage, but only how much you pay each month.
Qualifications and availability of loan recast
Before you get excited about the lower monthly payments, first make sure that your lender offers the recast, many don't. Furthermore, it is not something that is normally advertised, but most large banks offer it, including Chase, Bank of America and Wells Fargo. Furthermore, not all mortgages qualify for recasting; some types of loans, such as FHA and VA loans, cannot be repaid.
Recast of the loan with respect to refinancing
There is a big difference between repaying a mortgage and refinancing one, although both can help borrowers save money. Recasting is simpler than refinancing because it requires only a lump sum in exchange for lower monthly payments. With the recast, you are maintaining your existing loan, adjusting only the depreciation. It would not be possible to obtain a lower interest rate with the recast, as would be done with refinancing. On the other hand, if the interest rate is already low, refinancing could have a negative effect, especially if current rates are higher.
Refinancing, on the other hand, requires the request of a brand new loan and the payment of all the commissions arising from it, such as closing costs and valuation. The new loan would pay off your existing loan, so you could end up with a new mortgage and new interest rates.
People typically do this to get a lower interest rate or to switch from a variable rate mortgage to a fixed rate mortgage. If you already have a fixed rate mortgage with a low interest rate, a refi wouldn't help you. On the other hand, if you have a low interest 30-year fixed rate mortgage and want lower monthly payments, you might consider a recast.
The disadvantages of mortgage recast
The biggest financial disadvantage of the recast is that you are putting a large sum of money into shares. These are some of the reasons why you might want to rethink the recast:
It does not reduce the duration of the mortgage.
Your interest rate remains the same, a disadvantage if you have a higher interest rate.
More of your money is tied to equity.
The creditor charges a commission, usually no more than a few hundred dollars, to repay a loan.
In the current climate, with relatively low mortgage rates and a strong market, a recast of the loan may not make sense to some.