Refinance or Recast?
While refinancing is the most common method used to reduce monthly mortgage payments, a loan recast offers less than half the fees and paperwork, while keeping the same rate and amortization schedule. And, for a nominal fee, most lenders (with the exception of FHA and VA) will recast your mortgage loan.
If you’ve received a bonus, inheritance or other type of windfall and would like to reduce your monthly payment by applying a portion to your mortgage, you have two options: refinance or loan recast. If your lender offers recasts, you’ll typically be required to put down a minimum of 5 percent of your current principal balance.
Loan Recast Defined:
A loan recast is an adjustment to your monthly payments based on a reduced principal loan amount and the balance of your amortization. Your rate remains the same.
Loan Recast Broken Down:
Original Loan: $285,000
Original Term: 30 Year Fixed
Original Rate: 4%
Original Payment: $1360
After Ten Years of Payments
Current Loan: $224,535
Current Term: 30-year fixed
Current Rate: 4%
Current Payment: $1360
Now let’s take a look at what your payment look like after putting 10 percent down:
Current Loan Amount: $224,535
10% Payment: $22,453
New Loan: $202,082
New Loan Term: 20-year fixed
New Monthly Payment: $1,224
Benefits of Loan Recast
- When you recast your loan you are not resetting the 30-year loan clock, which means the majority of your payment will not be applied to interest. In effect, a loan recast avoids starting over.
- A loan recast does not require an appraisal.
- There is no need to pull credit.
- A loan recast typically only costs between $250-$500.
Disadvantages of Loan Recast
- A loan recast does not impact your rate, even if rates are lower than your current rate.
- While your monthly payments are reduced, your current loan term remains the same. If you want to pay down your loan faster, make 15-year monthly payments.
There are many financing options available to you be sure and speak with your financial adviser and mortgage professionalwhen considering a mortgage loan recast.
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