Recasting Mortgage Vs. Refinancing

Recasting Mortgage Vs. Refinancing


recasting mortgage vs refinancingAfter paying the mortgage loan for a while, you get the option to reduce your monthly payments. The best way to pay off your mortgage is to keep paying it. Paying a few extra hundred dollars each month can save you a year or two down the road.

Recasting and refinancing are two ways; you can structure your mortgage. Both options allow you to enjoy lower monthly payments and reduced interest rates. There are pros and cons to both choices. Depending on the interest rate and the loan duration, you can decide whether recasting or refinancing is a suitable choice for you.

What is Mortgage Refinancing?

It is similar to assuming a new loan. You go to a different lender, to secure a lower interest rate. The lender reviews your financial history and decides whether you qualify for the new loan. Keep in mind that getting a new loan means you’ll pay new appraisal & loan-origination fees. These fees can be more than 1% of the loan amount.

Since you’re refinancing, the total loan amount should be lower than the previous one. That’ll automatically result in reduced monthly installments. In this situation, the new lender pays the former lender. You qualify for a new loan thus you can also choose an entirely new loan structure.

Keep in mind that:

  • Refinancing requires some time and financial investment. The new lender will need a substantial down payment, a sound credit score, employment history, proof of income and various documents to study your case.
  • The new lender has the right to reject your application. If you’re underwater on the mortgage or need help with foreclosure prevention than refinancing is not the right choice. You need to modify the loan structure without refinancing it.
  • Refinancing resets the amortization schedule. As you might know, you first pay the interest rate and then the principal amount. If you have paid the mortgage for 5-10 years, that means, now most of your payments are going toward the principal amount. If you refinance at this stage, you’ll start from level 0, again paying a hefty sum for interest rate payments instead of paying your mortgage.

 

What is Mortgage Recasting?

Let’s say: You financed a house, 5-year ago with a 30-year mortgage plan. Over the years, you have paid a significant amount of money. You’re well ahead of schedule and, now you are planning to take rest.

You want to reduce your monthly installments and probably the accumulative interest rate. So you go to your lender, asking him to review the amortization principle for you. The lender will calculate how much you have paid down and how much is left.

Let’s say; the mortgage value was $200,000. You have paid $77,000 in principal amount in the first five years. That’s impressive. Now you are asking your lender to recalculate the payment schedule and spread the leftover money over the next 25 years.

In this situation, the interest rate remains the same. However, since the total debt amount is reduced, the interest can be lowered. If you want a lower/changed interest rate, then refinancing is the way.

Keep in mind:

  • Your lender might not approve the request. Recasting mortgage doesn’t require you to change mortgage companies.
  • FHA and VA loans don’t qualify for this option.
  • You wouldn’t get this choice if you got a Jumbo loan.
  • Lenders charge a small fee to process your case.

Which Option is Better?

Your situation determines the answer. However, the best solution is to keep paying your mortgage. That’s the best way to pay less in the interest rate. Your monthly payments will remain the same. In case of recasting, the size of your monthly payments will decrease, but you’re not paying off your loan earlier. Having debt is not a good idea. It is best to pay off your mortgage earlier.

Contact us for more information.

 

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