Recasting a mortgage

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My recent post discussed ways in which a buyer can make a non-contingent offer on a home in this competitive seller’s market. I mentioned recasting as an option to consider if a buyer could only make a minimum down payment on the new home if they don’t sell their current home. Having the mortgage recast later is a good way to get around not making a large down payment when going through the buying/selling process in reverse order (buying the new home and then selling the current home instead of selling then buying). What does recast mean?

A recast is a feature most loan servicers allow where remaining payments are recalculated based on the new principal balance. This is often done after a significant principal reduction takes place on the loan. A recast is a cheaper alternative than simply refinancing. If today’s mortgage rates are higher than the rate on the home owners current mortgage, then a recast would be a very good option should one make a large principal reduction and want to lower the monthly payment.

Here is an example of recasting. My client wants to purchase a new home without selling her current home. This way she makes a non-contingent offer to buy her new home. Ideally, my client would love to make a 20% down payment, but the money for the down payment is tied up as equity in her current home. All she could afford to do right now is 5% down. The purchase price is $400,000 with 5% down, so the loan amount is $380,000. This makes a monthly mortgage payment of $1,870 (not including taxes/insurance/PMI). My client buys the new home, then sells the current home. She now has an extra $100,000 to pay down the mortgage balance on her new home.

The new loan amount is $280,000, which is great! But… since this is a fixed rate loan, the monthly payment is still $1,870. Now she contacts her loan servicer and requests a recast of mortgage. The rate is the same, but the principal balance is much lower. When the loan is recast, now the payment drops to $1,377. This is how my client can purchase her new home without selling her current home first AND eventually get the payment to reflect the new loan amount.

Looking to buy a home in the state of Georgia, want to make a non-contingent offer, and recast later, contact me today. In just a few minutes, I can have you well on your way to make an offer on a home.

Also, a note to existing home owners who want to recast their loan. Be sure to contact your loan servicer before making the large principal reduction. You want to make sure the loan servicer will allow a recast. You also want to know the steps they want you to take to complete it. Perhaps they want you to complete a form and start the recast request prior to making the large principal reduction. Every loan servicer is different, so be sure to contact them to know exactly how they want you to go about it.

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One Response to “Recasting a mortgage”

  1. Making dreams reality | The Mortgage Blog Says:

    […] with student loans, low down payment options, low credit score options, buying without selling, recasting…. OR you could give me a call to discuss further. If you are buying a home in the great state […]

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