Should I Consider a Mortgage Recast?

A mortgage recast is a one-time “paydown” of your mortgage, which results in a lower payment.

Sounds good, but there are some things to consider before opting for a recast.

You can accelerate the payoff of your mortgage in two main ways: The one you are probably most familiar with is when you send in a specific amount of extra money each month with your mortgage payment to be applied to the balance.

The goal is that the stream of extra payments, over time, will lower the principal balance, reduce interest expense, and thus shorten the term of the mortgage.

For example, by annually making one extra payment of principal and interest this way, over the course of 12 monthly payments on a 30-year loan, you’ve taken roughly four years off the end of the loan.

Keep in mind, though, that throughout the whole process of this “paydown,” regardless of how long it continues, the base mortgage payment will remain the same.

The mortgage recast

A recast works a little bit differently. As opposed to the example above, when you made smaller payments over time, a recast is a one-time larger payment.

The recast process includes a recalculation of the mortgage payment downward. This could be beneficial to you as your monthly mortgage payment is lower. But you may want to consider the following:

First, not all lenders offer this option. If it’s something that you are hoping to do, discuss it with your lender before making plans. Second, the lender may have a minimum “paydown” amount, such as 10% of the original mortgage amount.

Finally, the lender may charge a fee for a mortgage recast. This can range from a nominal fee to well over $500. Lenders incur expenses in offering this option, and this is how they recoup some of this expense.

To learn more, contact your mortgage professional.

Your Closing Date Will Affect Your Closing Costs

Everyone knows mortgage payments are always due on the first day of the month. But, while this is correct, there’s more to the story.

If you make your mortgage payment on June 1, the principal and interest you’re paying are applied to the period of May 1 through May 31. This is called making payments in arrears, meaning you’re paying the principal and interest for the periodafter you use it.

And it’s important information to know when you are buying a home.

Why? Because the day of the month on which you have your closing will determine how much principal and interest you will pay at that time.

Take an April 22 closing: At that time, you’ll pay principal and interest to the lender from that date, April 22, through the end of the month, April 30.

As payments are made in arrears, the next mortgage payment that you make will be due on June 1. This will cover principal and interest for the month of May. The cycle then repeats itself.

So, if you close earlier in the month, say on April 4 or 5, you can expect to pay more in principal and interest than if you closed on the 24th or 25th.

This is important to know, in that it will factor into the equation when you and your mortgage professional are determining how much money you will need to take to closing.

If you have any questions about this, contact him or her for more details.

Use Your Home to Fuel Your Retirement Goals

Although mortgage rates are creeping up, they’re still very low.

So now may be the right time to discuss with your financial and mortgage advisors how you can use the equity in your home to further your financial goals.

They can help you find the approach that’s right for you.

Tapping your equity

There are a couple of ways you can take cash out of your home, and many places you can then invest it.

The first is a cash-out refinance of your existing mortgage, whereby you replace your existing mortgage with a new one, and pull out cash in the process. Typically, this approach comes with a lower rate than the second option.

This option involves some type of home equity loan or line of credit. If you go that route, you’ll then have two mortgages. Check with your tax professional to see if any of the interest on these mortgages is tax deductible.

Investing it

With cash in hand, here are two of many paths you can take to invest it and make it grow. The first is in some type of investment vehicle that your financial pro can recommend. Getting a rate of return on your financial investments that is greater than what you pay each month on your mortgage is one good way to build wealth over time.

Or you can invest the equity in the purchase of a rental property that will produce a monthly stream of income. Real estate has historically been a great investment, and this is a good way to prepare for retirement. If this is the right approach for you, your mortgage pro, real estate agent, and other members of their teams can help you by

  • researching current and future trends in the rental market you’re interested in,
  • running a return-on-investment analysis, and
  • finding and working out the details of your purchase.

Don’t Think Short Term, Get a Home Inspection

If you are a home buyer, your home inspector can be your best friend. However, many are concerned about the cost of an inspection and prefer to waive it. This is unwise. Here’s why.

A home inspection is a very detailed examination of all the major systems of a property. These include the plumbing, electrical, heating, and cooling systems as well as the structural integrity of the property, and radon gas, mold, and termite detection, as needed.

Unlike an appraisal – the report ordered by your lender, which is used to determine how much a property is worth, and which may uncover some of the more obvious issues – a home inspection is something you order. It looks at the property in greater detail and effectively educates you on the condition of your home-to-be.

There are a couple of reasons why you need a home inspection on any property you buy but especially on foreclosures that are often sold as-is.

First, there is a window of time (often five days) after you sign the purchase contract to get the home inspection and potentially back out of the sale. If you find a significant issue after this window expires, you still are obliged to purchase the property.

Second, the seller may be unaware of or unwilling to share details regarding the condition of the home. If an inspection uncovers a significant issue within that time window, you can renegotiate the price or walk away.

In all cases, you are your own advocate, and your home inspector facilitates this.