You may have heard the term “recasting” a loan before, but what does it mean? In this blog post, we’ll explain what recasting a loan is and how it can benefit you.
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What is recasting a loan?
When you recast a loan, you make a lump sum payment on your principal that decreases your monthly payments going forward. Recasting is different from refinancing because you don’t have to go through the process of applying for a new loan. You simply make a larger payment on the loan you already have.
Most lenders will allow you to recast your loan once you’ve made six monthly payments. To do so, you usually have to pay a fee equal to 1% of the loan amount. So, if you have a $200,000 mortgage, it would cost you $2,000 to recast the loan.
If you’re trying to save money on interest, recasting may not be the best option because it doesn’t lower your interest rate. However, it can be helpful if you want to ditch private mortgage insurance (PMI) or reduce your monthly payments without extending the life of your loan.
Recasting is most beneficial when:
-You want to get rid of PMI: If you make a lump sum payment that decreases your loan-to-value ratio (LTV) to 80% or less, you can ask your lender to cancel PMI. For example, if you have a $200,000 mortgage with a 10% down payment ($20,000), your LTV is 90%. If you make a $40,000 payment that brings your balance down to $160,000, your LTV is 80%, and you can request that PMI be canceled.
-You want to lower your monthly payments: A lump sum payment will lower your monthly payments because it reduces the balance of your loan. For example, say you have 20 years left on a $200,000 mortgage with a 4% interest rate and $2,198 monthly payments. If you make a $40,000 lump sum payment, your new balance will be $160,000 and your monthly payments will drop to $1,755—a savings of $443 per month.
-You come into unexpected money: If you inherit money or receive a windfall from another source and want to use it to pay off debt without taking on more debt by refinancing—recasting may be right for you.
How does recasting a loan work?
Recasting a loan is when you pay a lump sum of cash to your mortgage lender in order to lower your monthly payments. This can be a great way to save money if you come into some extra cash or if your financial situation changes and you can afford to make larger payments.
In order to recast your loan, you will need to contact your mortgage lender and let them know that you would like to make a lump sum payment. They will then recalculate your monthly payments based on the new balance of your loan. This can often result in significant savings, so it is definitely worth considering if you find yourself in a position where you can afford to make larger payments.
What are the benefits of recasting a loan?
There are several potential benefits to recasting a loan, including:
1. You may be able to lower your monthly payments.
2. You may be able to pay off your loan faster.
3. You may be able to reduce the total amount of interest you pay over the life of the loan.
4. You may be able to improve your credit score.
What are the drawbacks of recasting a loan?
In some cases, recasting a loan can have some drawbacks. For example, if you have a fixed-rate mortgage, recasting could cause you to lose the remaining interest rate protection on your loan. In addition, depending on your loan terms, recasting could also cause you to lose any prepayment penalties that may apply to your loan.
How do I know if recasting a loan is right for me?
If you’re considering recasting your mortgage loan, ask yourself the following questions:
-Are you comfortable with your current monthly mortgage payment?
-Do you have extra cash available to make a lump sum payment toward your principal balance?
-Would you like to reduce the amount of interest you pay over the life of your loan?
-Do you have a fixed-rate mortgage?
-Do you plan on staying in your home for at least a few more years?
If you answered yes to most of these questions, then recasting might be a good option for you. Remember, recasting is only available for certain types of loans, so be sure to check with your lender to see if it’s an option for you.