Loan Recasting: What You Should Know
Loan recasting can benefit borrowers who wish to adjust the terms of their current loan agreement. It is a viable option for those who are struggling to meet their payment obligations or want to reduce their monthly expenses. However, the process is not available for all types of loans, and it’s crucial to weigh the potential costs and benefits before deciding to go ahead with it.
What is recasting a loan?
Loan recasting is a process in which a borrower renegotiates the monthly payment for an existing mortgage loan with their mortgage lender.
Loan recasting can be a helpful option for borrowers who have improved their financial situation since taking out their original loan and want to reduce their monthly payment. However, loan recasting is not always an option and is only available for certain types of mortgages.
In order to initiate a loan recast, the borrower usually needs to contact the lender and make a significant lump sum payment, which is used reduce the overall mortgage loan balance.
After the lump sum payment has been made, the lender will recalculate the loan terms, considering the reduced loan balance and the remaining term of the loan. The monthly payment amount may be reduced as a result of the recalculation.
Advantages of loan recasting
Loan recasting can offer several advantages for borrowers:
- Lower monthly payments: One of the primary benefits of loan recasting is a lower monthly payment amount. This can be especially beneficial for borrowers who are struggling to make their monthly loan payments or who are seeking to free up more money in their budget.
- Reduced overall loan cost: By reducing the monthly payment amount, loan recasting can also help reduce the overall cost of the loan. This can be particularly beneficial for borrowers who are seeking to save money over the long-term.
- Improved credit standing: By successfully making their reduced monthly payments, borrowers can improve their credit standing and demonstrate their financial responsibility to future lenders.
Disadvantages of recasting
While loan recasting can offer several benefits for borrowers, it is also important to consider the following potential disadvantages:
- Lump sum payment required: To initiate a loan recast, borrowers must make a lump sum payment. The lump sum payment minimum can vary from lender to lender. This may not be feasible for all borrowers, especially those who have limited savings or are facing financial difficulties.
- Reduced flexibility: Once a loan has been recast, the terms of the loan are locked in and cannot be changed. This means that the borrower may not have the flexibility to adjust their loan terms in the future if their financial situation changes.
- Not available for all loans: Loan recasting is not available for all types of loans and may not be an option for every borrower. Borrowers should check with their lender to determine if loan recasting is available for their specific loan.
- Fees: Lenders may charge an administrative fee to process the recasting request and recalculate the payment. These fees may vary from lender to lender and range from a few hundred to a few thousand dollars.
Should I recast my loan
Whether or not you should recast your loan depends on your individual financial situation and goals. Here are some factors to consider when deciding if loan recasting is right for you:
- Affordability: If you are struggling to make your monthly loan payments, loan recasting may be a good option to reduce your monthly payment amount.
- Loan costs: Reducing the principle balance will also reduce the amount of interest you will pay the lender in the long-term.
- Loan type: Loan recasting is not available for all types of loans, so it is important to check with your lender to determine if it is an option for your specific loan.
- Financial goals: Consider your long-term financial goals when deciding if loan recasting is right for you. If you are looking to pay off your loan as quickly as possible, recasting may not be the best option.
- Availability of funds: If you have the funds available to make a lump sum payment, loan recasting can be a good option to reduce your monthly payment amount and overall loan cost.
- Opportunity cost: Consider what other options you have for your lump sum payment, like another financial investment with a higher rate of return.
How much does loan recasting cost?
Loan recasting typically involves an administrative fee that is charged by the lender to recalculate the loan terms. The fee can vary depending on the lender, the type of loan, and the amount of the loan balance that is being recast. The fee for loan recasting can range from a few hundred dollars to a few thousand dollars. It is important to note that the fee for loan recasting is separate from any other fees that may be associated with the loan, such as prepayment penalties or origination fees.
Ultimately, the decision to recast your loan is a personal one and depends on your individual financial situation and goals. Loan recasting can be a useful tool for borrowers who are seeking to reduce their monthly payments or overall loan cost.
It is important to carefully consider all potential advantages and disadvantages before deciding to go forward with a loan recast. Review the loan agreement and discuss the details of loan recasting with the lender to fully understand the fees and costs associated with the process. Borrowers should consider the potential savings from loan recasting and weigh them against the costs of the process to determine if it is a cost-effective option for their individual financial situation and long-term goals.
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I have been in the mortgage industry since 1997 and I understand the anxiety that comes with making the most expensive investment of a lifetime. My objective is to be your advisor, to educate you and to make the mortgage loan transaction as transparent and as stress-free as possible. I enjoy establishing personal connections and work mostly by referral. I thoroughly explain the process and available options, and guide my clients to make choices that best fit their needs and financial goals. Once the underwriting begins I communicate regularly and keep my clients apprised of the loan status from the beginning through the end. My relationship with clients does not end at the closing table. You are my client for life and I am always available to answer your questions and provide you with guidance.