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Recasting a loan for lower payments and savings.

As someone whose income is 100% reliant on commission, making a down payment in the middle of a fiscal year can be challenging. Anyone who relies on commission knows that it’s possible to project where the year will end, but there is reason to be cautious and accurate when dipping into savings accounts for a larger-than-average sum of money. Especially with real estate, which has a lengthy “slower-season” in December - March, it was important for Leslie and I to make a wise choice about how much we were going to put down on our new house. With that in mind, we reached out to our lender about a mortgage option that allowed us to put a very small initial down payment (only 5%) with the option of adding as much as we wanted to it within 4 months of our initial purchase. For our situation, we knew this would take us into the heart of “slow season” and we would have an accurate picture of our financial situation and could make a smarter choice for how much to put down on our home. For many, the uncertainty that comes with living a life that is based on commission prevents them from making a move to the home of their dreams. With this option, I hope more of my clients with unpredictable incomes feel empowered to make wise, calculated decisions about their current and future home prospects.

How Recasting Works By: Justin Pritchard

With most home loans (such as 15-year or 30-year fixed rate mortgages), you pay the loan off with fixed monthly payments. Those payments generally don’t change over the life of your loan unless you use an adjustable rate mortgage – if you pay $1,500 per month on day one, you’ll keep paying the same amount.

Recasting is a way to lower your monthly mortgage payments without getting a new loan. In addition to an easier cash flow situation, you can also save money over the remaining life of your mortgage loan.

When you recast a loan, you make a large payment, and your lender recalculates your monthly mortgage payments. It can be helpful in several situations:

Lower Monthly Payments: if your required payments are too high, a recast can result in an easier-to-afford monthly payment

Pay Down Debt: if you have a substantial amount of money, and you want to reduce your debt, a recast lets you do that and enjoy a lower payment

Loan payments are calculated based on several factors:

  • Debt Amount – how much you borrowed

  • Interest Rate on the loan

  • The amount of time you’ll take to repay the loan (also known as the term)

If you change any of those inputs, the resulting monthly payment will change. However, loan payments typically don’t change after the loan is made. You can send extra money every month or write a large check, but your lender won’t change your monthly payment unless you request (and get approved for) a recast.

Getting a Recast

To recast your loan, talk with your lender. Start asking about the process early on because you need some important details:

Does Your Lender Allow Mortgage Recasts? Some don’t, and it’s not worth wasting your time if it’s not an option.

What Is the Minimum Required Lump-Sum Payment to Qualify for a Recast? You may need to wait and save for a longer period. Minimums of $5,000 are not uncommon.

How Much Does It Cost to Recast? You’ll probably have to pay a fee of several hundred dollars. Factor this in while you consider how long you’ll keep the loan. Again, you might want to wait and make a larger payment (if the situation is right) so that you get more bang for your buck.

What Will Your New Payment Be? Find out how much of an impact your lump-sum payoff will make. It might not be as great as you hope.

How Much Will You Save on Interest? Most people focus on the monthly payment, but interest costs are also important. You might save more if you make a lump sum payment and you don’t recast the loan. Recasting lowers your payment (after you’ve reduced the debt) so that you pay off the loan on the originally-scheduled date. However, if you continue making the original payment – after making a lump-sum payment to reduce the loan balance – you’ll pay down your loan faster and save money on interest.

The Formalities Once you’re ready to move forward, it’s just a matter of filling out forms and sending money. Make sure you know when to reduce your payment and wait until you’re certain that it’s safe to do so. After that, find something productive to do with the extra money each month: save for retirement or other important goals.

Run the Numbers

Your mortgage lender can provide you with helpful information. However, you might prefer to tinker with the numbers yourself. To do so, you’ll need to model how the loan gets paid off over time. It is known as amortization – and it’s not that hard to do.

You can calculate your loan’s progress by hand, but spreadsheets make the process easier. Pick a date when you’ll make the lump sum payment, and reduce your loan balance accordingly. Then, calculate what the new payment would be assuming the same payoff date (in other words, if you’ve got 12 years remaining on your loan, calculate for 12 years – don’t start over with a 30-year loan).

Next, look at the numbers to see how much you’re saving. Experiment with different payment amounts and find what works for you.

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