What You Should Know About Mortgage Recasting in 2021

What is a Mortgage Recast?

A mortgage recast, also known as debt recast, is a feature of some types of mortgages where the remaining monthly payments are recalculated based on a new amortization schedule.  During a mortgage recast, the borrower owes a large amount towards their principal, and their mortgage is then recalculated based on the new, reduced balance outstanding.

mortgage recasting in 2021
Mortgage Recast

Some mortgages have a set recalculation date, which is the date when the lender will calculate a new amortization schedule based on the remaining original balance and duration of the mortgage.

key takeaways: 

(a) A Recast occurs when a borrower pays a large amount towards the principal of their mortgage, and the lender recalculates the loan based on the new balance.

(b) When the lender recalculates the loan, they will create a new amortization schedule, which is a table of loan payments showing the principal and interest that each payment includes until the loan is paid in full. is.

(c) The main benefit for the borrower of reclaiming a mortgage is the opportunity to reduce monthly payments.

(d) A negative amortization loan or option adjustable-rate mortgage (option ARM) is often a mortgage repurchase clause as part of a loan contract.

How a Mortgage Recast Works?

For the borrower, the primary benefit of Recasting the mortgage is to reduce the monthly payment. Often, a mortgage lender will shorten the duration of a loan only if the additional principal payment is made, but maintain the same fixed monthly amount - only by increasing the principal amount and reducing the interest portion of the payment.

Recasting can reduce the amount of interest the borrower will pay over the life of the loan if sufficiently large principal payments are made, reducing both the remaining interest and the principal on the new monthly payments of the loan.

How do I qualify for mortgage Recast?

"Not all lenders offer mortgages and not all types of mortgages are eligible".

Here you need to qualify for a Mortgage Recast:

You should not have a government-backed loan. You cannot Recast an FHA, USDA, or VA loan under current government regulations. Most jumbo loans are excluded from reuse. If you want to change the terms of this type of mortgage, you will need to refinance your loan.

Your current lender should offer a Recasting. Not every lender offers a Recasting. Contact your lender and ask if it is also an option.

You must meet the minimum basic deficiency standards. Most lenders require a minimum amount before qualifying for a recast (usually $ 5,000), although it may also be a percentage of your principal. No minimum lump sum payment is required with Rocket Mortgage®.

You should meet the equity requirements. You may need a certain amount of equity in your loan before you qualify once again. Again, this can be either a fixed dollar amount or a percentage of your original balance. Reusing with Rocket Mortgage® can mean that you must reduce your original balance by at least $ 10,000 in the year before you qualify.

You should be able to pay a Recasting fee. These fees are much lower than the refinance costs. For example, Rocket Mortgage® charges $ 250 to withdraw your loan.

You must meet the requirements of your lender's payment history. Your lender may require that you have a history of premature payments that allows you to recur. For example, Rocket Mortgage® requires that you have at least two consecutive payments on your current loan.

Keep in mind that personal standards can vary by lender, so it is best to see what you can qualify for.

Should I refinance or refinance my mortgage?

The good news is that there are plenty of ways to save money on mortgages, including Recasting and refinances. Both methods will save you money, but their mechanics are different. There are advantages and disadvantages with either choice, so it is important that you understand the differences to make a decision that is best for you.

(1) Recast your mortgage

The following are some pros and cons to Recast your Mortgage.

Pros:

Recasting is less expensive. Instead of paying closing costs like you would with a refinance, you usually just pay a small flat-rate Recasting fee.

There are no credit or evaluation requirements. You do not need to meet the credit score requirements to retrieve your loan. Also, there is no need for you to worry about waiting for an evaluation to refinance.

You can keep your current interest rate. A Recast may allow you to keep your current interest rate, whereas, with a refinance, you usually have to accept the current market rate.

You can save on interest and reduce your payment. If you have a large amount of money to go towards your loan, then there may be the right solution, but you are not sure how your income will change in the future. Recasting allows you to save on interest without incurring higher monthly payments.

You apply your lump sum directly to the principal. Ask your lender if they offer a Recasting in the event that they do not allow you to apply the principal directly.

Cons:

Your lender has not allowed this. Some lenders do not allow you to apply an additional payment to your loan principal - this will go towards the next month's payment. Although it will pay you forward on your payment, it did not save you any money on interest.

You are not eligible for Recast. Government programs such as FHA and VA loans are generally not eligible for Recasting.

You are required to make a minimum payment amount. If you make a minimum lump sum payment, which is either a specific fixed amount or a percentage of your principal, the lender usually only considers a reconsideration. Also, you will need to pay the fee

You do not reduce the term of your loan. Your monthly payment will be reduced, but your tenure will remain the same.

Reduces liquidity. Your cash will be tied to your home equity, which means that you will need to take a home equity loan to access your contributed funds.

Mortgage Recast v/s Refinance

Mortgage Recast may be a more comfortable option than refinancing. With a refinance, you replace your current mortgage with a new mortgage loan, which can be expensive and depends on your credit standing. A mortgage Recast does not include a credit check and continues with the original mortgage.

On the other hand, refinancing a mortgage means paying off the existing debt and replacing it with a new one. Why homeowners involved in refinancing:

1,) An opportunity to get a lower interest rate.

2.) To shorten the duration of their mortgage.

3.) Willingness to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice versa.

4.) An opportunity to tap into home equity to finance a large purchase.

5.) To consolidate debt.

Refinancing your mortgage

There are benefits and downsides to refinancing. Here are a few of them.

Pros:

(a) You can change your loan. You have the option to change the terms of your loan when you refinance. You can shorten your tenure, lengthen it, charge a lower interest rate and also refinance to a new loan type. For example, to remove insurance, many homeowners refinance their FHA loans to traditional loans as soon as they reach 20% equity. When you withdraw your loan, you cannot change your principal.

(b) Most mortgages are eligible. You can refinance any type of mortgage loan. If you have a government-backed loan or jumbo loan, refinancing may be your only option to change your monthly payment.

(c) You can choose a new lender. Dissatisfied with your current lender? You can refinance your mortgage loan with a new one.

Cons:

(a) High Cost. A new loan typically costs more than a mortgage. This includes origination fees, appraisal fees, and other related closing costs.

(b) Pay more interest. When you are getting a new loan, you are technically starting from scratch. You usually pay more interest at the beginning of your loan and will move towards the principal later. Also, if you refinance for a longer period, you can pay more of the interest over the entire lifetime of your loan.

(Warning⚠️)

"Unlike refinancing a mortgage, recasting a mortgage will not reduce the interest rate on your mortgage".

Types of mortgages that can be Recast:

Negative Amortization Loan

Mortgage Recast can be written into the loan terms and is associated with a negative amortization loan. The negative amortization of a loan has a payment structure that allows a fixed payment that is less than the loan's interest charge.

When the payment is less than the interest charge on time, it creates deferred interest. The amount of interest created is added to the principal balance of the loan, creating a situation where the principal increases over time rather than decreases. Due to this increasing principal, negative amortization mortgages require that the loan is renewed at some point so that it can be repaid by the end of its stated term.

Negative amortization mortgages are also sometimes triggered which may cause an undetermined reinstatement. For example, if the principal balance of the loan reaches a set limit through negative amortization, it can kick.

Option Adjustable-Rate Mortgage (Option ARM)

A negative amortization mortgage is also known as a payment option adjustable-rate mortgage (option ARM). These mortgages give borrowers options that include paying all principal and interest or paying only some interest.

While ARM allows more flexibility on the option payments available with an option, the borrower can easily end up with a longer-term loan than before. As with other adjustable-rate mortgages, interest rates are likely to change rapidly and rapidly depending on the market.

Example of a mortgage Recast.

Even if a mortgage does not include a restructured option, you can contact your lender to see if the mortgage repurchase will benefit you and reduce your monthly payment. By making a lump sum payment and renovating your mortgage, you can reduce your housing costs. Conversely, if you deposit a lump sum without recurring, you reduce your balance but your monthly payments will remain the same.

0/Post a Comment/Comments

Previous Post Next Post