What is mortgage re-amortization / recasting and why do it?

Mortgage Re-Amortization Explained

While the advantMortgage re-amortizationages and potential drawbacks of refinancing are well-known to most home buyers the loan recasting is an unexplored option. If you are looking to diminish your monthly payment amount and also save on interest you can take advantage of a strategy, called “recasting,” or “re-amortization. This game plan allows you to lower your monthly mortgage payment so that the payments repay the accrued interest and full principal of a loan by a certain date.

When Recasting Occurs

There are several circumstances when your loan can be re-casted:
  • In case you have just received a large inheritance or settlement you can apply this amount to considerably reduce the unpaid principal balance of your loan and to lower your monthly payment
  • An adjustable-rate (ARM) loan is recasted each time the interest rate changes, using the remaining repayment interval and balance however it will feature the new interest rate.
  • In case a loan is past due, the mortgage lender can offer to recast your mortgage loan by adding the missed payments to the principal balance by adding the unpaid amounts as a result your monthly payments will be a little higher.

Eligibility

In order to be eligible for a re-amortization, you have to check if your lender allows it, as not all mortgage lenders offer this option. For borrowers who are not able to refinance due to credit issues or low home equity, a loan re-amortization could be a valuable option. Compared to a loan refinance a loan re-amortization differs in several ways:
  • Instead of taking money out of the equity as in some refinances, you will have to put in a lump sum payment usually of minimum $5,000 or 10 percent of the remaining loan balance with the goal of lowering the principal owed.
  • Although your monthly payments will be lowered the terms and conditions of the loan will not change.
  • You will be asked by your mortgage lender for an administrative fee of $150- 250$ or even a little more for this service. However you will not be asked to pay any closing costs or to submit to another credit check as you would have to in case you would refinance your loan as you are not asking for a new loan.

Reasons to Recast a Loan

 Most borrowers who have available a large sum of money choose to recast their loans in order to reduce their monthly payments and make them more affordable. In case you want to repay your loan even faster you can choose to continue to make the previous monthly payments. It is worth checking if your mortgage lender accepts a loan recasting in case you decide to buy a new house before your current home has sold. If you manage to qualify for a new mortgage while still paying for your previous home you can request a loan re-amortization with the proceeds after your previous house sells.
Drawbacks of Recasting Your Mortgage
  • You will be asked to make a considerable payment; carefully calculate if it is worth recasting your loan or if you would be better off using the cash for other purposes.
  • The interest rate is not going to change ; however it might change if you decide to refinance
  • Although you put down a substantial amount you won’t pay off your loan any faster.
  • Not all loans can be re-casted, according to Fannie Mae or Freddie Mac only conventional loans are eligible. FHA and VA loans cannot be re-amortized while the jumbo loans can be only be re-amortized if your lender approves it. In case your mortgage loan has been sold to an investor he/she must also agree to the recasting.
Calculate your re-amortized monthly payment
If you would like to calculate the new monthly payment after your loan has been recasted you can either use the following formula: P[r(1+r)^n]/{[(1+r)^n]-1} where "P" is the initial Principal (loan amount), "r" is the interest rate per period, and "n" is the number of remaining monthly payments or you can use an online amortization calculator such as the ones available on the following websites: http://www.amortization-calc.com/ or http://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx In order to determine if recasting your mortgage is a good idea or not accurately calculate how much your re-casted payment will be and how much it would save you over the remainder of the payoff period.
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