Refinance Alternative: Mortgage Recast
You can upgrade an outfit from office attire to evening wear by switching out the shoes. What's even better is to swap an unaffordable mortgage payment for an affordable one-and all you have to do is ask.
If you ask your mortgage lender for a mortgage recast, be ready to make an extra principal payment, and you could end up with a reduced monthly payment and lower overall interest costs. A mortgage recast, which is a recalculation of your mortgage payments, is an easier alternative to refinancing or modification.
Chances are, you're wondering how much that extra principal payment has to be to create savings. Let's look at an example. Say you borrowed $300,000 at 6 percent five years ago. On this loan, your monthly payment would be $1,799, and your current balance would be $279,163. A $20,000 principal payment plus a recast would reduce the monthly payment by $189 to $1,610, with no extension of the loan. You could create even more savings if the extra principal payment allows you to cancel your private mortgage insurance (PMI).
Recast vs. refinance
You can also lower your payment by refinancing your loan and extending the maturity date. That strategy, however, is vastly more expensive than recasting. You'll have to cover the closing costs and the additional interest associated with extending the term of your debt. Pushing out your final payoff date may also require you to postpone your retirement.
By comparison, a recast costs you almost nothing. Your bank may charge you a recast fee of a few hundred dollars. But, your overall interest costs will go down, and your payoff schedule will not change. You do have to make the extra principal payment, but that's money you'd have to repay eventually, anyway.
Recast vs. modification
A mortgage loan modification, like a recast, has no closing costs. The drawback of a modification is that you have to prove that you can't afford your current payment. You also have to deal with a system that's massively overburdened with modification requests. For that reason, modifications are more appropriate as a last resort. If recasting is an option, try that first. It will be simpler and less stressful to execute.
Now, for the bad news. Not all lenders will allow you to recast. So, don't send off a check until you clarify the procedure and any fees involved. Remember to ask your lender for the recast payment quote in writing.
The hardest part of the transaction will be budgeting for that extra payment. Ideally, you would use a bonus from work, a recent inheritance, or some other cash windfall. A second option would be to tap into your savings, which may or may not make sense. Assess your overall financial situation in detail to decide if that strategy benefits you over the long term.
Having your mortgage recast is slightly more difficult than changing your shoes, but the benefits are better. You'll save money, owe less, and keep your retirement plans intact.
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