When you buy a home using a mortgage loan, you will have to repay your lender by making monthly payments. These mortgage payments usually stay the same for the duration of the repayment period. Over the years, coming up with the money for the monthly mortgage payment can be a burden, or you may simply come to the conclusion that your payment is too large and would like to lower it.
There are two ways in which you can lower your monthly payment. The first one, and the most popular, is refinancing, which helps you get a new loan with better terms. Unfortunately, the high cost of refinancing can make this option seem less appealing, especially if current mortgage rates are not that advantageous. In that situation, you could actually be losing money by refinancing. So, when refinancing, you have to make sure that the new loan plus the closing costs won’t end up costing you more money than your original mortgage loan. Refinancing is usually a great choice when interest rates are very low and when you are sure that you are able to secure a much lower rate than you have now. The second option that you have, when you want to reduce your monthly payment, is mortgage loan recasting. Depending on what interest rates are offered by lenders and on what your current financial situation is, mortgage loan recasting can make more sense than refinancing.
What is Mortgage Loan Recasting?
On most mortgage loans, the monthly payment stays the same until the loan is paid off. You may want to reduce your monthly mortgage payment because you want to pay less interest or simply because you have recently received a large sum of money, possibly from an inheritance or a holiday bonus. Most lenders don’t allow you to repay your mortgage loan earlier, so your only option is to recast your mortgage. When recasting a mortgage loan, you make a larger payment towards the principal on your loan, after which your lender will calculate a new amortization schedule which will be based on your new mortgage loan balance.
Mortgage loan recasting is a good alternative for borrowers who are unable to refinance due to having low home equity, or for those who have come to the conclusion that it is not a good time to refinance their mortgage. Mortgage loan recasting is also significantly less expensive than refinancing. On average, mortgage recasting only costs a few hundred dollars.
Advantages and Disadvantages to Mortgage Loan Recasting
The largest benefit that recasting your mortgage loan has is that it reduces the remaining balance on your loan, therefore making your monthly mortgage payment lower. You have the option of making the same monthly payment and paying off your mortgage loan quicker, or using the difference for other expenses. Another advantage is when buying a new home before you have sold your previous one. After finally making the sale, you can use the profit to recast your new mortgage.
The biggest disadvantage of mortgage loan recasting is that you have to make a large payment towards the principal of the mortgage loan. That sum of money could be invested into something that could yield a return, or simply kept in a savings account as an emergency fund. Another disadvantage, especially when compared to refinancing, is that the interest rate on your loan will stay the same after mortgage loan recasting. If interest rates are low, it could make more sense to refinance and lower the interest rate on your mortgage.
Before deciding to do a mortgage loan recasting, make sure that you understand what the advantages and disadvantages are, and make sure that refinancing isn’t a better option. Your main goal should be saving money, and you should always take the path that brings you the most savings.