Loan recasting is not always understood by many, although some families may choose to renew their mortgage, one should know that not all are eligible for this facility.
Some institutions may not have a renewal policy on the mortgage. However, refinancing comes with a few benefits; it can save money in two forms.
Your monthly mortgage payment can be reduced
It always helps you avoid refinancing charges
This form of recast allows you to keep the same loan tenure, and the loan interest rate, payment made monthly, can be reduced to match the current loan balance.
For example, if your 6years a 30-year mortgage, once the loan has been recast, you will remain with 24 years of balance payment. For the recast to take effect, you will need to pay an additional sum of money to reduce the overall balance.
The amount which you pay off will directly reflect on how much you will save on the recast. The other way to reduce your monthly mortgage payment can be to pay a sum of money to minimize the existing loan and, in turn, will reduce your overall debt, but this will not reduce your monthly loan payment.
HOW THIS WORKS
If you have spare cash in hand, receive a big bonus or an inheritance from a late uncle, and wish to pay your balance mortgage.
Since you paid off the balance mortgage before time, you will be eligible for a reduction in interest payment and your loan payments will be rescheduled.
Different lenders have individual requirements for loan recasting; some lenders, for example, require you to pay a sum of $5000 to 10% of the loan amount, whichever is more significant to adjust and reduce the balance before you are found eligible for recasting.
Let’s say you come up with $400,000 mortgage at a rate of 4% interest for 30 years, your monthly interest and principal would be $1,910. You consider paying the rent for ten years, balance remaining would be $315,136.
Now you make a lump sum payment of 10%, which is $31,554, bringing the balance loan amount to $283,582.In this situation, the monthly payment of your loan would reduce to $1,718; you will need to consider receiving a $200 reduction on your monthly payment would have cost you a massive sum payment to cut it.
Lenders can charge a fee for this transaction; this usually comes as low as $250.
ARE YOU ELIGIBLE?
Your Eligibility to pay off the loan for a recast will be based on your ability to pay the required loan amount, and the lenders will also look if your payment history is in check.
appraisals and credit check won’t be necessary for this form of transaction
WHAT ADVANTAGES CAN YOU EXPECT
1. A poor credit score does not impact on loan recasts even if you have a bad repayment history, you might be considered eligible.
2. Finding your home has not depreciated drastically in value; your request for recast will be considered. Since equity of at least 5% to 10% is only considered.
3. Home refinancing may require an expenditure of up to 6% of your loan balance, by recasting your loan this will help you smoothly manage your cash flow without incurring the expense of a home refinance.
In certain scenarios, what you spend in refinancing can make a significant reduction in your overall balance, which will make you eligible for the loan recast.
Let say you are a homeowner and purchased a new house while you have an existing mortgage. you might end up paying both mortgages for a short term up until your old home is sold.
Once you receive the payment you could use the profit on the sale to pay you your balance mortgage and recast the loan. This will help with affordable payments.
What you need to keep in mind is that the usual waiting time after a loan repayment is 90 days until your eligible for the recast.
LET’S LOOK AT THE DISADVANTAGES
Be sure to always assess your entire financial plan before entering into a recast. Here are a few situations which can be bad for you.
1. Make sure your funds are prioritized before recasting your loan. Consider paying off your immediate debts, such as credit cards or personal loans. Strongly consider having cash reserves for emergencies and other expenses before spending all your profits for the recast.
2. Loan tenure will not be shortened once you have paid for a recast, as most us try to pay off the mortgage before our retirement. Although a recast may not shorten the tenure, it can make a difference in your mortgage balance, which can be reduced to biweekly payments.
Or you may want to consider making regular payments to the principle and reduce the overall loan rather than a recast.
3. If your rate of interest is high on your ongoing loan, it is more advisable to consider a loan refinancing since you can compare costs and figure out which plan suits your need.
WORDS OF WISDOM
If you have spare cash, don’t rush into a recast, always consult your advisors and the lender to find out what best method you find to reduce your payment. If you’re buying a new home while still having your old house, a recast will be the better option for you.
For those who battle with credit challenges and have a home with reduced value, a recast will benefit them more than a refinancing.
