Learn whether “recasting your home loan” is a better option than refinancing for you and your family…
It is important that you realize that there are many loan options available for those who desire to purchase or refinance their home. In this discussion we will look at some of those options and particularly those that can help you build wealth more effectively and efficiently in the current economy.
First and foremost it is important that you realize that there are basically two types of mortgage loans—government backed and conventional and they both require that you purchase insurance (with a few exceptions) if you put less than 20% down in order to protect their (lenders) interest in case of your default.
Government Backed versus Conventional
It is important that you understand the difference between government backed and conventional loans.
FHA, VA and USDA all fall under government backed loans and they may require that you pay MIP or a funding fee during the life of the loan or a certain time period that you have the loan. The interest rate may be slightly higher than conventional, however you would primarily benefit by having a lower out of pocket down payment. In addition, the credit score requirement is usually lower than that of conventional loans.
With conventional loans you would normally have a higher down payment, however, “homer ready” loans and possibly others offered by Fannie Mae https://www.knowyouroptions.com/buy/affordable-mortgage-options/homeready could be an affordable option for those who qualify and the loan meets their intended goals.
FANNIE MAE and FREDDIE MAC normally insure conventional loans and they are often packaged or bundled together and sold in the secondary market in ways that can provide a continuous stream of cash for lenders to make even more home loans available.
They too have an “insurance premium” that you would pay if you put less than 20% down and the premium for a conventional mortgage is known as PMI (Private Mortgage Insurance) as opposed to MIP (Mortgage Insurance Premium) and they both basically have the same function—to protect the lender from risk of loss due to your low down payment and equity position!
In the following paragraphs we will discuss:
- Recasting or Re-amortizing Your Loan
- Home Equity Loan/Home Equity Line of Credit
- Refinance (Straight/Cash Out)
- 80/10/10 to avoid PMI/MIP
- Renovation Loans (FHA 203k and Fannie Mae)
Recasting or Re-amortizing Your Loan
A little-known strategy, called “recasting,” or “re-amortization,” is available through some mortgage lenders and servicers. It involves paying off a lump sum of the principal amount and asking to have the monthly payments reset according to the original interest rate and loan terms.
Most lenders charge a fee or at a minimum thousands of dollars to be paid toward reducing the remaining loan balance to recast your loan. Bank of America and Wells Fargo Home Mortgage charge customers $250 for a loan recast. At Wells Fargo, customers must make a lump sum payment of $5,000 or 10 percent of the remaining loan balance, whichever is greater, to qualify for a loan recast.
Keep in mind that lenders can change amounts at any time so use the above figures as a guide only as it is best to contact your particular lender.
Essentially, a loan recast means that while your interest rate and your home loan term remain unchanged, your monthly mortgage payment is reduced to reflect your actual current loan balance!
For recasting to work, lenders “require” an additional lump sum payment to reduce your balance.
In order to determine if recasting your mortgage can save you money in the long-run you will have to “run the numbers” under various scenarios that are unique to your and your family’s future goals and current financial condition.
Recasting, also called re–amortization by some, is a little-known alternative to lower your mortgage payments.
It doesn’t change your interest rate or the term of your loan, however it will reduce the amount you pay each month on your current owner occupied home that has a mortgage loan—usually from traditional lenders.
To amortize a loan usually means establishing a series of equal monthly payments that will provide the lender with:
*interest based on each month’s unpaid principal balance, and
*principal repayments that will cause the unpaid principal balance to be zero at the end of the loan
It is important that you compare recasting with other well known loan options that you may already be familiar with!
- Refinancing—keep in mind that you lower your monthly payments, but you often pay hefty fees and go through a credit check.
- Paying off part of the principal with a lump sum or paying additional principal on a monthly, semi-annual or other timely basis—you can normally do this easily with most lenders, however you are only shortening the length of the mortgage as the monthly payments will remain the same.
- Recasting or re-amortizing—you reduce your monthly payments by paying a lump sum against your principal, but you skip the credit check and pay virtually no fees with this approach.
Other Reasons Why You May Want to Recast Your Home Loan
- You’re self-employed or have poor credit, making refinancing a tough proposition.
- You recently refinanced your mortgage and came across additional unexpected income but you don’t want to go through the cost and hassle again of refinancing but you would like to lower your monthly payment some.
- You usually invest spare cash in the stock market, but the outlook is so bleak you might as well reduce your mortgage. This is especially true if you also have a high mortgage and can’t refinance.
*You close on your new home and sell your current home at a later date and you want to use some or all of the proceeds to pay down your mortgage to reduce the monthly mortgage payment and balance but not the term of the loan.
Because the fees are so small, you don’t have to figure out a breakeven point as you do with a refinance.
However, if you have less than $5,000 in cash available for recasting your mortgage loan, it will be difficult to get your lender to agree to it, and it will only make a minimal difference anyway if the amount is that low.
Besides, it is not wise to deplete your emergency fund and not have cash readily available for life’s “unexpected” happenings.
When recasting may not be a good choice
*If you pay a high rate on your loan and you have good credit, a refinance may be worth the cost, especially if you have a legitimate need for a cash-out refinance.
- If you have a lump sum and a mortgage at a low rate, you’re better off investing your money elsewhere where you can get a better return. The S&P 500, NASDAQ and other financial markets consistently appreciate at a higher level (over 10% in many years) than the benefit you might get by recasting your mortgage. Investing in the market, REIT’s and other investment options in many cases could earn you more than paying down your mortgage to get a lower monthly payment.
Even though you know there’s no guarantee with the stock market, REIT’s or other investment choices—it still might be a better option for you depending on your risk tolerance level and other factors.
- If banks loosen up and grant new mortgages to riskier prospects that could also sway the choice of recasting–and make refinancing a better choice if you have weak credit at this time.
- If you pay a high rate and have good credit, a refinance may be worth the cost, especially if you have a legitimate need for a cash-out refinance, such as remodeling your home, paying for tuition or other options (i.e. carrying more interest so that you could better utilize that interest for tax purposes) that would make refinancing a better choice than recasting your loan.
To reiterate how recasting works:
You must first determine that recasting your mortgage is the best choice or at a minimum a good choice and then you must get your bank to agree to a recasting, and you must then:
- Pay the lender a one-time fee in the neighborhood of $250 or more.
- Pay a lump sum toward your mortgage, typically $5,000 or more.
- Ask your lender to amortize the remaining balance and change your monthly payments, as opposed to just reducing the principal.
You have a remaining principal on mortgage of $400,000 and you put $40,000 toward recasting your loan bringing the remaining principal down to $360,000.
*20 years left on mortgage
*6% interest rate
$2,866 monthly payment on $400,000 loan
After recasting your mortgage you would still have 20 years left on your mortgage and your interest rate would still be 6%, however your remaining balance would drop to $360,000 and your monthly payment would drop to $2,580
Monthly reduction: $286
Monthly Reduction * 240 (20 years) = $286 * 240 = $68,640
$68,640 (savings over 20 year period) minus $40,000 (the initial lump sum payment) = $28,640 in additional savings over the life of your loan, or another way of analysis is you paid $40,000 to save $28,640 over a 20 year period by lowering your monthly payment by $286 for the remaining 240 payments.
How long will it take for the bank or mortgage company to complete a Mortgage Loan Recast?
A recasting is technically a lot simpler than a refinance in how it works and the ease in which it is created, however, in actuality it can take longer than a refinance because you need the approval of the owner of the loan, which in many cases may not be the bank that services it!
Many banks may take several months to process the request and then several months to implement the new payment.
Therefore, if you are considering recasting your loan–ask the bank upfront about the fees, the minimum amount required to recast the loan and the processing time from the day you start up until the time that you will make the new lower payment if the loan recast is agreed to by the owner of the loan.
Always realize that banks aren’t obligated to recast or re-amortize your loan and they actually have little incentive, given the low fees they get from the strategy.
However, if you are one who can benefit or feel you can benefit after proper analysis, and you have the gumption to ask and further inquire—and you have done your homework and know that you can truly benefit—many banks will let you recast your loan as long as you ask—however don’t expect the bank to advertise the loan in the same way it might advertise a refinance because they will only earn crumbs, whereas with a refinance or new mortgage they can get a whole slice of bread!
Be sure to use the mortgage recast calculator below to see if recasting is a feasible or worthwhile option for you at this time—keeping the above discussion in mind as a starting point to see if you can benefit.
Mortgage recast calculator:
Recasting vs. shortening your mortgage
You really have to know your plan for your mortgage and run the numbers to figure out the best option for you. Do you plan on moving in the near future? Is a job transfer looming down the road? Will your kids be graduating from high school and you plan on downsizing?
If you plan on consistently over-paying your mortgage, then recasting usually will not provide much of a benefit. However, if you plan on just making a big payment once, and would prefer to reduce your monthly mortgage expenses instead of shortening the overall timeframe, then re-amortization might be something that you would seriously want to consider.
Reducing the time length of your mortgage loan can have bigger costs up front as you’re putting more money in now, but your pay off will be on the huge decrease in your monthly expenses when it’s finished (early payoff of mortgage).
You will also have saved possibly tens of thousands of dollars in interest payments and depending on your goals you may or may not have a need to carry interest depending on your tax, family situation and other factors that are unique to you.
Only you and your family (and possibly your financial advisor) have all the information needed to run the numbers properly and decide which option will put you ahead and better serve your long-term goals during your lifetime.
While many homeowners are familiar with the option of refinancing their mortgage, not all homeowners understand loan recasting. This may be because not all lenders offer recasting or re-amortizing, and not all borrowers are eligible.
However, the process could save you money in two potentially big ways by reducing your monthly mortgage payment and by allowing you to avoid the cost to refinance.
Essentially, a loan recast means that while your interest rate and your loan term remain unchanged, your monthly mortgage payment is reduced to reflect your actual current loan balance. For example, if you’re 10 years into a 30-year mortgage, once you recast your loan, you will still have 20 years remaining to pay it off.
For recasting to work, lenders require an additional lump sum payment to reduce your balance. The size of that additional payment impacts how much you can save with a loan recast. However, instead of recasting, you could pay a lump sum toward your existing loan, which would decrease your balance, but not reduce your monthly mortgage payment.
Loan recasting can make sense if you inherit money (or receive a significant bonus at work) and wish to apply it to the balance on your mortgage. Because you reduce the balance ahead of schedule, you ultimately will pay less interest and the key benefit of a lower payment will be achieved.
Individual lenders have different requirements for loan recasting. 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 they would qualify you for loan recasting.
However, keep in mind that while saving possibly several hundred dollars per month on your mortgage payment may seem great, you will also have spent a significant amount of money to achieve that reduction in payment!
Always remember that even though lenders do charge a small fee for loan recasting, it is often as low as $250 and they really don’t make a lot by recasting–therefore you will rarely if ever see loan recasting advertised.
Does Your Current Home Loan Qualify?
Loan recasts are allowed on conventional, conforming Fannie Mae and Freddie Mac loans, but not on FHA mortgage loans or VA loans. Some lenders recast jumbo loans, but consider them on a case-by-case basis.
In order to qualify for a loan recast, you must be current on your loan payments, and have the cash necessary to pay down your principal balance.
A credit check and an appraisal are not necessary!
Why Should You Recast Your Home Loan
Some of the advantages of a loan recast include:
Reduced Payment. By recasting your loan, you can ease your cash flow without the expense of a home refinance, which can require an expenditure of as much as 6% of your loan balance. In fact, in some cases, what would be spent on the refinance could be used to reduce your balance enough to qualify for a loan recast.
No Appraisal Required. Unlike a home refinance, a loan recast does not require an appraisal. If your home has dropped in value, you may not be eligible for a refinance, since most lenders only refinance a home with at least 5% to 10% in equity.
No Credit Check Needed. Loan recasts generally do not require credit approval. If you have credit issues and cannot qualify for a refinance, you may still qualify for a loan recast.
A few homeowners that the creator of TheWealthIncreaser.com has worked with have deliberately use the loan recast strategy for paying down the principal on their new home after selling their existing home.
Just remember that you typically need to wait 90 days after your loan goes to settlement before you can recast it in most states.
Why You Should Not Recast Your Home Loan
Before you decide to recast your loan, you would be wise to evaluate it in the context of your entire financial plan–or in a comprehensive manner.
Some of the disadvantages of loan recasting include:
Ties Up Your Cash. If you have a lump sum of cash, make sure that paying down your mortgage is the absolute best use of that money. If you have high-interest credit card debt, you should more than likely pay that off first.
If you lack an emergency fund or you need to set aside money for other expenses such as a new car, educational or other household purposes, it’s probably best that you not put your entire windfall or a large portion toward paying down your mortgage.
Doesn’t Reduce Your Mortgage Term. You should also consider loan recasting 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 your loan term, although it could improve your cash flow.
If your goal is to reduce your mortgage balance, switching to biweekly mortgage payments or simply making regular extra payments to your principal may be a better option than a loan recast.
Doesn’t Reduce Your Interest Rate. If you are paying a high interest rate, a refinance may be a better option. A lender can compare the costs and monthly payments on a refinance and a loan recast to determine which is the best fit for you. Be sure you know your credit standing and make improvements if needed to open up more options for your loan choice.
Keep in mind that mortgage loan recasting isn’t for everyone, but if you have extra cash along with a properly funded emergency fund, consult your lender and use what you have learned on this page to see if this method of reducing your monthly payment is right for you.
If you are a homeowner considering selling your current home and moving into another in the future but have yet to sell your current home, you could very well benefit from a loan recast.
Furthermore, if your home value has gone down or you currently have credit challenges, you may also benefit more from a loan recast as opposed to refinancing your loan.
However, prior to actually inquiring about a mortgage loan recast be sure that you have mastery of your credit at this time as you may be able to get your credit in a respectable range where options other than recasting your mortgage will be more beneficial.
Home Equity Loan or HELOC (Home Equity Line of Credit)
A home equity loan or home equity line of credit may be a more appropriate choice for you if you have decent to excellent credit and you have run the numbers based on current market conditions (the current home mortgage rates) and you have determined that a refinance or HEL/HELOC will save you money or will otherwise be more beneficial.
A home refinance typically falls into one of two categories: straight or cash-out.
In a straight refinance, you come out of the process owing the same amount as before, but the terms of the loan are different.
Refinancing is basically just replacing one loan (or set of loans) with another loan (or set of loans), normally on terms more advantageous to the borrower.
When you straight refinance your mortgage, you’re taking out a brand-new mortgage on your home and using the money to pay off the existing loan but with better terms (usually a shorter duration and/or a better interest rate).
In most cases, most people do a straight refinance in order to get a better interest rate, which could possibly save them tens of thousands of dollars in future payments.
In a cash-out refinance, you come out owing more than before (your loan balance increases), because you convert some of your home equity to cash during the refinance.
For example, say you owe $300,000 on a house worth $400,000, which means you have $100,000 in equity. In a cash-out refinance, you might take out a new loan for $350,000, of which $300,000 goes to pay off the original mortgage and $50,000 becomes cash in your pocket.
That cash really isn’t free money though. It came out of your home equity, which falls by $50,000 from $100,000 to $50,000. However, you now have $50,000 in your pocket to do as you please and the tax ramifications are very favorable to you–normally $0.
How much will I save if I refinance?
The savings available from a straight refinance depend on how much you can lower your interest rate and how much time remains on your original mortgage.
Say you originally took out a 30-year mortgage for $300,000 at 6 percent interest. Your monthly mortgage payment will be about $1,799. After five years, you’ll still owe about $280,000, and over the remaining 25 years, you’ll pay about $260,000 in interest on top of that remaining principal.
Now say you did a straight refinance for the current $300,000 balance, but this time at 4.5 percent interest, and you do it over 25 years, to match the remaining term of your current mortgage. Your new monthly payment will be about $1,667 a savings of about $122 a month.
Over the next 25 years, your total interest payments will decrease and you will have savings of more than $35,000.
What a difference 1.5 percentage points can make over time.
Why Should I Choose Refinancing Over Other Options?
Advantages of refinancing:
Though the interest savings is reason enough to do a straight “refinance,” you can find other compelling reasons to get rid of your old home debt for a fresh new home loan. You might have an adjustable-rate mortgage, which has payments that rise and fall, and want the security of a fixed-rate loan or you may want to eliminate PMI or MIP.
If you have more than one mortgage or a home-equity loan on top of your original loan, a straight refinance allows you to consolidate that home loan into a single loan.
You may even do a straight refinance to address household issues, to add (or remove) a new spouse or partner to the mortgage loan or use your creativity and unique position at this time to find even more reasons to justify a straight refinance–in addition to the savings in interest.
Streamline refinancing is an option for borrowers who want to take advantage of low interest rates, get out of an adjustable rate mortgage (ARM) or graduated payment mortgage (GPM). Both the FHA and VA offer streamline refinancing for home mortgages.
This program is different than the FHA and VA streamline refinance programs, where neither an appraisal nor income documentation is required.
A conventional refinance is any refinance loan that conforms to guidelines set by Fannie Mae or Freddie Mac.
This type of refinance is available with as little as 3% equity with the 97% conventional refinance program.
For a conventional refinance the lender requires an appraisal and documentation regarding the borrower’s income and assets.
The FHA streamline refinance program helps current FHA homeowners lower their rate and payment without most of the traditional refinance documentation.
It is a fast and cost-effective way to refinance that comes with lenient documentation and credit standards.
In 2017, the FHA streamline could become an even better value. FHA could lower its mortgage insurance premiums by 0.25% this year after HUD administrators review FHA’s financial stability. Even without that reduction, though, the FHA streamline is still an incredible “deal.” Many borrowers can drop their interest rate and their monthly mortgage insurance thanks to a previous MIP cut in 2015.
To further entice FHA mortgage holders, FHA offers upfront mortgage insurance premium (upfront MIP) refunds. A portion of the premium paid when the original FHA loan closed will be applied to the upfront MIP on the new FHA loan.
80/10/10 to Avoid PMI or MIP
There are many loan choices available and many have PMI or MIP if you put less s than 20% down. An 80/10/10 loan means that you would be obtaining one loan for 80% of the home purchase price, a 10% down payment from your funds and a 10% second mortgage from the same–or a different lender.
By structuring your loan in the above manner you could avoid the monthly payment of PMI or MIP that could be several thousand dollars depending on the purchase price and the structuring of your loan. An 80/10/10 loan is a proven way that many consumers have avoided this annoying premium for years. However, not all lenders will structure a loan in this manner so you may have to shop around until you find a lender(s) that will agree to structuring a loan in this or a similar manner.
203k or Fannie Mae Rehab Loan or Refinance
Should I put money down that I have now and do renovations or should I seek a loan and do the needed repairs?
Whether you currently own a home that is in need of rehab or you have plans to purchase a home in the future that may need to be rehabbed for your personal home you can use renovation loans to do so. FHA 203k rehab loans can in many cases be streamline financed into a regular FHA loan if certain conditions are met.
There are many other loan options available such as seller financing, combining multiple loans to avoid PMI such as an 80/10/10 loan and many other creative options in addition to those mentioned above.
The key point to remember when selecting a home loan (or any loan) is to select the loan that works best for you and your family at the time of selection and throughout the period that you will (or at least intend on carrying the loan) have the loan. A pre-qualification or pre-approval on the front end is usually a wise choice as well when you are considering the purchase of a new home. Always begin your loan selection with the end in mind.
You must remember that there are many loans available and the creativity of loans are limited only by the imagination of the lender (and what they or their company will accept), the buyer and the seller.
What you have learned in this discussion is what can get your mind jumpstarted on just what is available to get you to search out or create a loan type that works best for you and your family whether you are seeking a conventional loan, a government backed loan, an owner financed loan or any creative type loan that you may pursue.
In addition, realize that hard money loans, lease purchase and lease with the option to purchase is yet another way to possibly purchase your home and they both have added benefits and drawbacks depending on your current financial position.
Also realize that the best approach, generally speaking is to gain mastery of your credit, save for a down payment (and emergency fund) and address all of your future goals in a comprehensive manner “prior to” purchasing your home or refinancing your home loan.
It is the hope of TheWealthIncreaser.com that this page has started you on a path to purchasing or refinancing your home in a manner that serves the greater interest of you and your family—and not that of lenders and others who have no real concern for your future wellbeing.
All the best to your selection of the best home loan option that will lead to your success…
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