What Is Mortgage Recasting? – In this episode we covered mortgage reforms. Normally, this question comes up when a borrower has just received a lump sum of money, either from a recent inheritance, a bonus, or by selling a home, and is interested in a principal reduction.
There are two general ways to deal with the new influx of cash: 1) Refinance your mortgage, 2) Pay off the principal without a refinance
What Is Mortgage Recasting?
Unlike a traditional refinance, with a refinance you basically go into an existing loan, open it and redo it without starting from scratch.
What’s A Mortgage Recast?
Let’s say you just had $100,000 in and you started with a $300,000 mortgage. When you do a reprocessing, you will put this $100,000 toward the principal. You will tell the bank that you want to do a review and they will reduce the balance from $300,000 to $200,000. The remaining time on the loan will remain the same, but your monthly payment will decrease which, as a result, will reduce the amount of interest you owe over the term of the loan.
It is important to note that neither your interest rate nor the number of years remaining on the loan will change with reworkings. It is the loan amount that changes in a review, not the loan itself. You will also usually need to have several months of payments under your belt. As a rule, we recommend at least two. You also can’t just give the bank a $5000 principal reduction and ask for a reprocessing. They will usually require a minimum of $10,000 and some banks will limit you to one refinance per year, and only a few over the life of the loan. You should also expect there to be a fee, usually between $200 and $300, although this varies from bank to bank.
But it should be noted that because it’s not a refinance, there are no appraisals and you don’t have to go through an approval process. There will only be an administrative fee.
If you are interested in re-processing, be sure to check with your service bank about their rules and whether they allow for re-evictions or not.
What Is Mortgage Recasting And Why Should You Do It?
Say you put the $100,000 off against the $300,000, but you don’t rework. In this case, the bank will apply it to your monthly balance. They will keep your payments the same, but your mortgage payoff timeline will be accelerated, and as a result, the interest you will owe will decrease over time because you have reduced the number of payments remaining.
A review is more so for someone on a fixed budget, or fixed income, and they have to strategically come within a certain dollar amount per month. Typically, people who come to us with a little extra money will usually decide to simply pay off their mortgage earlier.
If you have any questions about this or if you have any questions you’d like us to answer on our podcast, you can email your questions to team@ or call us at (602) 535-2171. Be sure to ask us for a free quote for your next mortgage. We will personally work with you and help you through the entire process.
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Recast Mortgage: What Is It & How Do You Calculate It?
Be sure to ask us for a free quote for your next mortgage. We will personally work with you and help you through the entire process.
Signature Home Loans LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Signature Home Loans NMLS 1007154, NMLS #210917 and 1618695. Equal Housing Lender. Most mortgage loans today allow borrowers to prepay their mortgage without penalty. Prepayments can come from paying more than the minimum payment each month, making an extra payment each year, or a lump sum payment for the mortgage’s principal balance. When the principal is paid in advance, it shortens the life of the mortgage loan.
When making a lump sum payment, many lenders give the borrower the option to reduce the monthly payment instead of reducing the loan term. The new balance is then amortized (recovered) over the remaining loan term to determine a new, reduced monthly payment.
Reconsolidation results in a lower monthly payment and reduces the total interest you will pay over the life of the loan. Here’s a comparison of a lump sum payment, with and without compounding, assuming a 3% rate on a 30-year mortgage, compounding after five years:
What Is Mortgage Recasting?
Both options will save the homeowner interest, one by shortening the term and the other by reducing the monthly payment. The decision to remodel is a personal one, based on the homeowner’s individual priorities and goals – do I want to pay off my mortgage sooner? or do I prefer additional monthly cash flow?
Some loan types, including FHA and VA, do not allow reconsolidation payments. And some lenders require a minimum lump sum payment, usually $5,000. A reset trigger is a clause in a loan contract that makes an unscheduled change to the loan’s remaining amortization schedule, such as the repayment schedule, should certain conditions be met.
Reset triggers should not be confused with a mortgage reset. In the latter, an amortization schedule is recalculated and adjusted based on changes in principal payments. For example, a mortgage can be reformed if the principal amount has been partially prepaid.
A reset trigger essentially changes the scope of the amortization schedule to ensure on-time payments. In particular, the clause addresses negative amortization bonds. By definition, a negative amortization occurs when the principal balance of a loan increases because a borrower has failed to make payments that cover the interest owed.
Recasting Versus Refinancing Your Mortgage Loan
The remaining interest due is added to the loan principal. When the bond’s outstanding principal balance rises to a certain percentage, typically between 110% and 125% of the bond’s original principal balance, the trigger kicks in and the regroup becomes effective.
Negative amortization can occur with certain types of adjustable-rate mortgages (ARMs), including payment option adjustable-rate mortgages. These mortgages allow borrowers several ways to pay off the mortgage, such as paying all the principal and interest, paying only the interest, or paying only a portion of the interest. Although the borrower can appreciate the different payment options with an option ARM, the borrower may pay more in the long run.
A reset trigger carries certain risks that borrowers should familiarize themselves with when engaging in the mortgage application process because a lack of understanding can cause real financial distress.
When an adjustable-rate payment option mortgage reaches its negative amortization limit and triggers an unscheduled reset, the monthly payment is likely to increase significantly, resulting in payment shock.
Mortgage Recasting: How It Can Save You Money
The affordable payment the borrower paid could turn into a significant financial burden should the rate on the ARM adjust and require a larger monthly payment. In an extreme scenario, the payment can rise to the point where the borrower has no choice but to default on the debt.
Before taking out an adjustable-rate mortgage (ARM), make sure you can afford the mortgage if the interest rate rises, which increases the mortgage’s monthly payments.
In particular, even a modest increase in interest rates, depending on the level of the mortgage’s negative amortization limit, can trigger an unscheduled rework several months before Month 61, which is typically the first scheduled rework on a payment option ARM.
It is standard operating procedure for an option ARM loan to rebuild every five or 10 years, so Month 61 is an important marker on the path to loan repayment. This is when a new minimum payment is calculated. This must be paid in Month61 based on the fully indexed rate, the remaining term of the loan and the loan balance at that time.
Open Notepad With Mortgage Recast Handwritten Inscription Stock Photo
Reset triggers are most often associated with loans that are linked to adjustable rates. This is mainly because the trigger clauses allow for changes to the loan’s time frame and payment schedule.
For example, if a borrower has a 10-year ARM loan and misses a few payments, then the reformed trigger helps adjust their payment schedule and amount.
Likewise, if interest rates continue to rise even if the borrower makes the minimum required payment, then the negative amortization limit kicks in and the borrower could be on the hook for penalties.
A mortgage refinance is when a borrower with a mortgage pays a large sum of money towards the mortgage and the borrower then reworks the loan. Restructuring the loan refers to the reamortization of the loan, resulting in reduced monthly payments due to the new reduced balance. Refinancing your mortgage can save you money in the long run.
Should You Ask Your Mortgage Lender About Recasting?
Negative amortization occurs when the borrower of a loan makes payments that are less than the interest owed. This results in an increase in the loan balance as the unpaid interest charges are added to the loan. After the maturity date of the loan, the borrower may have to make