Have a Tight Budget? Reduce Monthly Mortgage Costs By Recasting

Do you want to take advantage of mortgage interest rates while they're still low? With interest rates only going higher, now may be your last, best chance to save thousands of dollars on your existing mortgage.

But before you make plans to refinance, consider the advantages of a lesser-known mortgage adjustment vehicle: recasting. What is recasting? And is it right for you? Here are a few answers to these questions.

In its simplest form, recasting a mortgage means recalculating your mortgage - including the monthly payment - based on what you actually owe at the moment. In addition, recasting generally requires that you put in a lump sum payment to reduce the overall amount due.

Because recasting bases the new payment on the amount remaining after the lump sum payment, your payments for the rest of your mortgage are lowered, and you generally end up paying much less interest over the course of the loan - even if you stay on track for the same number of years and at the same interest rate.

First, if you have a sudden windfall, it's a great way to invest in your home and save some cash. Many loan providers require that you put in 10 percent of the loan amount as a lump sum payment. Depending on your remaining mortgage, this payment could represent as little as one large holiday bonus, the sale of a vehicle after the kids move out, the proceeds from selling another property, or a small inheritance.

Secondly, if you want to reduce your monthly amount due, recasting is a cheaper and easier option than refinancing. Refinancing comes with a variety of costs, including new closing fees and an appraisal. In contrast, recasting avoids these fees while achieving that same monthly expense reduction.

Third, if your home has lost some value or your credit score has gone down, you may not be able to refinance. Most lenders won't refinance above a certain percent of the value of the home. If your loan falls within that amount, you could be out of luck with refinancing.

Recasting doesn't require a new appraisal, so you can gain wiggle room in your budget without worrying about dropping home values in your area. And if you've had some hits to your credit, keep in mind that recasting doesn't involve a credit check.

Of course, even in the best situation, every mortgage option has a few cons as well as pros. Recasting involves tying up a significant chunk of additional cash. If you don't have a lot of liquid cash readily available, you could put yourself in a bind if you need that cash for future emergencies, house repairs, or other issues.

And keep in mind that recasting doesn't reduce the overall length of the contract. You'll have lower payments, but you'll have them for the normal remaining term of the mortgage. If you're close to retirement, for instance, you may want to look at other options to pay off the loan before leaving your job.

Finally, not all loans can be recast. Traditional mortgages through Fannie Mae or Freddie Mac are often eligible, but others - including Veterans Affairs and Federal Housing Administration loans - generally aren't.

If you think that recasting your mortgage might be a good choice for your situation, work with an experienced mortgage broker to learn more. At Cornerstone Residential Mortgage, we offer a large variety of options for all types of borrowers, and we specialize in recasting loans. Call today to speak with our home finance experts.