Mortgage recast agreement: What it is and how it works
For many homeowners, paying off their mortgage sooner than the agreed-upon term is a top priority. One way to achieve this goal is through a mortgage recast agreement. In this article, we`ll explain what a mortgage recast is, how it works, and what you need to know before pursuing one.
What is a mortgage recast?
A mortgage recast is a process where a borrower pays a lump sum of money towards their principal balance, which then reduces their monthly mortgage payments. The borrower`s interest rate and term of their mortgage remain the same, but their monthly payments are adjusted to reflect the new, lower principal balance.
For example, if a borrower has a mortgage with a principal balance of $250,000, an interest rate of 4%, and a 30-year term, their monthly payment would be around $1,193. If they were to make a lump sum payment of $50,000 towards their principal balance and request a recast, their new monthly payment would be around $943. The term of their mortgage would still be 30 years, but they would pay less interest over the life of their loan.
How does a mortgage recast work?
To qualify for a mortgage recast, most lenders require a minimum lump sum payment towards the principal balance. This amount can vary but is typically around $5,000 to $10,000. Once the payment is made, the lender recalculates the borrower`s monthly payment based on the new, lower principal balance.
It`s important to note that not all lenders offer mortgage recasts. Some lenders may charge a fee for the recast, while others may require the borrower to pay for an appraisal or other fees associated with the process.
Benefits of a mortgage recast
The main benefit of a mortgage recast is that it offers a lower monthly payment without the need to refinance. Refinancing can be time-consuming, costly, and may require a new appraisal, credit check, or income verification. A mortgage recast, on the other hand, can be a quick and easy way to reduce monthly payments without the hassle of refinancing.
Another benefit of a mortgage recast is that it allows borrowers to pay down their principal balance faster, which can lead to significant interest savings over the life of the loan.
Risks of a mortgage recast
While a mortgage recast can be a useful tool for certain borrowers, it`s not the right choice for everyone. One downside of a mortgage recast is that it doesn`t lower the interest rate on the loan. If interest rates have gone down significantly since the borrower originally took out their mortgage, it may be more beneficial to refinance instead of recasting.
Additionally, borrowers should be aware that the lump sum payment they make towards their principal balance is not readily accessible. Unlike a savings account or other investment, the equity in a home is not easily liquidated. If unexpected expenses arise, the borrower may not have access to the funds they used for the recast.
Conclusion
A mortgage recast can be a helpful tool for homeowners looking to lower their monthly mortgage payments without the need to refinance. It`s important to weigh the benefits and risks of a recast, however, and consider all options before making a decision. If you`re unsure whether a mortgage recast is right for you, consult with a financial advisor or loan officer before moving forward.