We spoke to Mike Hendrickson, Sr. Mortgage Consultant at U.S. Bank, to get his thoughts on mortgage "recasting." Here's what he had to say:
Many of my clients move here from other towns and have not yet sold their home—although they would prefer to sell before buying—it does not always work out that way. Thus, they lose the ability to utilize the equity in their homes to secure a new mortgage on their next home. Having an existing HELOC on the property or securing a bridge loan on the current home are two ways to access the equity for a larger down payment on the new home. Not everyone can do this and usually, no one really wants (or has the time) to do this. In these cases—and it happens a lot—I explain a mortgage 'recast' to my borrower. A mortgage recast is a little known tool and not one that many lenders explain upfront in the process. What is it? How does it work? What is the advantage?
Simply put, mortgage recasting is when a borrower makes a large payment to the principal of the existing home, and the lender agrees to re-amortize the loan.
- When doing this you reduce your loan amount and the new balance is then “recast” or re-amortized over the remaining life of the loan.
- You get to keep your rate and original term while reducing your payment to what it would have looked like as if you put that much down, to begin with.
- It also costs less than a full refinance and does not require a new underwriting for a new mortgage, nor is there a potential increase in rate.
- Those are just some of the advantages.
Let's use an example: You buy a home for $600,000 and would like to finance only 80% of that but money is tied up in your existing home or other assets. At a rate of say, 2.75% your 30-year principal and interest payment would be $1960.00 per month. Now, let's say you finance 90%, or $540,000. Your payment would be $2205.00, but when your home sells 4 months later, it would be in the ballpark of $1967.00 per month if you recast it.
Recasting cuts your monthly payments and the amount of interest you will pay over the life of the loan without affecting your interest rate. Also, you can recast every year if you’d like to cut your payment and overall costs without raising your interest rate. If you’d like to know more about how this works and how to approach your lender give me a call at 904-614-0309.
This article was prepared by:
Sr. Mortgage Consultant