After posting The Hardest Mortgage Refinance Ever, a reader asked me if I’ve ever considered switching a mortgage.
My quick answer was no, despite refinancing multiple mortgages on multiple properties since 2005. My main goal is to get the lowest possible mortgage rate.
Re-mortgaging may be a good idea if you have a lump sum of cash and want to lower your monthly mortgage payment without going through the hassle of refinancing.
I want to explain the advantages and disadvantages of a mortgage switch in this post. Just because I’ve only refinanced my mortgages doesn’t mean we should ignore the benefits of repaying a mortgage. For those of you who have recast, feel free to join in as well.
WHAT IS A REDEEMED MORTGAGE LOAN?
A mortgage recast is a feature on some mortgages where the remaining payments are recalculated based on a new amortization schedule. During a mortgage restructuring, an individual pays an additional lump sum toward their principal, and their mortgage is recalculated based on the latest balance.
For example, let’s say you have five years on a 30-year 4% amortization mortgage. Your loan amount is $500,000, and your property value is $700,000 for an LTV of 71.4%. Your monthly payment is $2,387.
You’re happy with your lender, you’re satisfied with your 4% mortgage interest rate, you have a loan that allows you to reissue, and you don’t want to go through the hassle of refinancing a loan and paying excessive fees. Plus, you just inherited $200,000 from your late aunt.
If you use the $200,000 to pay down the principal of $500,000 to $300,000, your monthly mortgage payment will stay the same at $2,387. The only thing that will change is the payment percentage allocated to the principal (plus) and interest (minus). If your goal is to increase monthly cash flow pay off principal without refinancing or recasting, it won’t help you.
But if your lender allows you to switch your mortgage, you can use the $200,000 to pay off the principal and have the remaining $300,000 amortized over a new 25-year amortization schedule. If so, your new monthly payment would decrease by $803 to $1,584.
DETERMINE ELIGIBILITY TO RELAUNCH YOUR MORTGAGE
Your lender usually requires you to pay a lump sum toward the principal to relaunch your loan. Paying 10% or more is expected. There is usually a small fee to relaunch (<$500). Also, not all mortgages have the option to relaunch.
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Loan repayments are allowed on conventional and conforming loans from Fannie Mae and Freddie Mac but not on FHA home loans or VA loans. FHA and VA loans already provide borrowers with many benefits, such as a lower down payment and subsidized lower interest rates.
Some lenders repay jumbo loans, negative amortization loans, and ARMS options but consider them case-by-case basis. You will need to ask your lender if your loan is eligible. Also, before you refinance your loan, you must apply.
Finally, to qualify for a loan recast, you must be current on your loan payments and have the cash to pay off your principal balance.
ADVANTAGES OF MORTGAGE RESTRUCTURING
These are the main advantages of mortgage recast versus mortgage refinancing. They are:
- Reduced payment. By paying a lump sum, you will lower your monthly payments.
- No evaluation is required. Unlike a home-refinance, a loan recast does not require an appraisal. The average cost of a home appraisal is between $600 and $800, depending on the size of your home and where you live. My last review was $620 with WF, but $800 with Citi for the same house!
- No credit check is needed. Loan repayments generally do not require credit approval. This is great if you have suboptimal credit or can’t get the best refinance rate due to suboptimal credit. The average credit score for a qualified mortgage is now about 760.
- It prevents you from relaxing. Since you need to get a lump sum to repay your mortgage, you’re taking the right step to pay off your loan and pay less interest. It’s elementary to refinance your mortgage multiple times and delay payment because the amortization schedule always resets to zero.
- Improve transition financial problem. You can buy a new home in some cases before selling your current home. I never recommend doing this as many things can go wrong when trying to sell. But if you do, you may have to pay off two mortgages temporarily. If you have proceeds from the sale of your home, you can use those proceeds to change your mortgage to lower your payments. Since you just got a new mortgage on your new home, it rarely makes sense to refinance since rates probably haven’t changed much, and the fees incurred would make refinancing so soon not worth it.
DISADVANTAGES OF MORTGAGE RESTRUCTURING
Now that we’ve discussed the benefits of mortgage recasts let’s look at the negatives.
- It requires a lot of cash. To relaunch a mortgage, you must get a large lump sum. Depending on your cash situation, pumping more money into a primary residence may not be the wisest move. Not only will you reduce your liquidity, but you will also forfeit any potential return your cash may generate. If you have other debt at higher interest rates, it may be better first to implement FS-DAIR and pay off other debt.
- It does not reduce the term of the mortgage. A loan recast will not shorten the time of your loan. It will just keep you on track with a lower payment. If you want to shorten the term of your mortgage, you will still need to pay additional principal after the mortgage recast is complete.
- Your interest rate stays the same. A recast lowers your monthly payments, but it doesn’t lower your interest rate. My last refinancing was 2.625%. If I could change my mortgage, I would be paying 4.5%, even though I only have 25 years left.
