Should You "Recast" Your Mortgage?
I was recently asked if “recasting” was better than “refinancing” a home mortgage.
Let me explain the differences.
Suppose you have $5,000 and want to apply it towards your mortgage. A recast is when you use that money to reduce the unpaid principal balance of your loan and lower the monthly payment. In this case, your loan term and interest rate remain unchanged. However, re-amortizing the loan based on the newly reduced principal amount would result in a lower monthly payment.
According to bankrate.com,“Typically, only fixed-rate loans can be recast, but adjustable-rate loans may be considered on a case-by-case basis."
Now, if you used that $5,000 to refinance your mortgage, you would have to spend your cash on getting a brand new loan at a lower interest rate.
If you have extra cash to apply towards your mortgage and need to lower your monthly payments, recasting is a good option. If you don’t need to lower your monthly payments, then simply apply the $5,000 to reduce the balance and keep your payments the same.
It does require that you do the math so look at all three options.
Over the long term, you will likely save the most money paying off principal and keeping your monthly payments the same vs. recasting or refinancing.
Remember a simple rule, your maximum mortgage amount should be around 2 x your annual income or less to avoid getting in a financial bind. If you are feeling the pinch in your finances, lower your mortgage costs using one of these methods.
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