Should you consider recasting rather than refinancing your mortgage?

Have you come into a nice sum of money that you plan on using to reduce the balance on your home mortgage? If so, you have three choices.

• You can make a lump sum payment on your current mortgage
• You can refinance into a new mortgage
• You can recast your current mortgage

What’s the difference between these options?

Making a lump sum payment is simplest. You don’t have to do a thing except increase the amount of the check when you make your next payment.

The result will be that you’ll pay less in interest because your monthly balance will be less. Since your payments will remain the same and you now owe less, you’ll also take time off the end of your mortgage.

Refinancing your mortgage entails going back to your lender and getting an entirely new loan.

With this option you can reduce the number of years remaining on your loan – or you can increase them. If you have 25 years remaining on a 30-year loan, you might choose to refinance for a new 30-year period. Between that and the lower loan balance, your payments will be significantly reduced.

Recasting your mortgage is a simple process. You simply pay a small fee to the bank, make your lump sum payment, and the bank will re-calculate your payments based on the lower loan balance. For instance, lets assume that you’re making payments on a $200,000 loan at 4.5% interest. Your principal and interest payments on a 30-year loan will be $1,013. If you recast that mortgage and reduce the loan balance by $20,000, your new payment will be $912.03.

Here at Homewood Mortgage, the recast fee is $150 and the minimum lump sum payment is $12,000. Borrowers may only exercise this option once during the life of the loan.

Which option is best for you?

Making a lump sum payment is something you can do at any time. You might choose to increase your payments each year when you get a tax refund or an annual bonus. Many homeowners choose to simply add a few dollars each month to bring the balance down faster.

This option has no effect on your monthly payment, but it reduces the term of your mortgage, and thus the number of dollars you’ll pay in interest over time.

Refinancing your mortgage is the most expensive option and takes the most time. You’ll need a new appraisal and you’ll pay the standard loan fees. You’ll also be required to re-qualify based on your current income, obligations, and credit scores. However, it can be beneficial if you can refinance at a significantly lower interest rate.

To decide if this is a good option, compare the cost of the new loan, which could be upwards of $4,500, to the amount you’ll save each month. Generally, this is only a good idea if you plan to stay in the house for at least 5 more years.

Recasting a mortgage is easier, since you don’t have to qualify, no appraisal is required, and the fee is low.

However, there are drawbacks. First, recasting is  possible only with a conventional loan. FHA and VA loans are not eligible. Next, not all banks offer recasting, and you must have a large lump sum with which to reduce the principal balance.

Recasting might be a good idea if current interest rates are higher than the rate you’re paying, because nothing about your mortgage loan changes except the balance and the monthly payment. You’ll keep the same loan term and interest rate.

To decide if it’s right for you, weigh the benefits of having a lower monthly mortgage payment against having a large sum of liquid cash at your disposal.

If you’re interested in refinancing or recasting your current mortgage loan, give us a call at Homewood Mortgage, the Mike Clover Group. We’ll be glad to show you what each option will cost, show you the new payment amount with each option, and help you compare the numbers to decide which Is best for you.