Real (estate) Talk: Take Notes on how to Recast a Note
What is a Recast?
A. You broke your arm and the doctor put the cast on the wrong arm.
B. You were selected as the Lead actor in a movie, but then you were called back to only
play an extra
C. You made a large principal reduction on your mortgage and you want the lender to
re-amortize your loan and lower your payment.
When purchasing a property, the borrower typically receives an amortization schedule which will outline his monthly payments over the term of the loan. The amortization schedule will illustrate to the borrower how much of the monthly payment will go towards the principal amount of the loan, versus how much will go towards paying the interest amount of the loan. Is it possible for the borrower to make a large, lump-sum payment towards the principal balance of their loan or mortgage? Unless otherwise agreed in the Promissory Note or Deed of Trust, then yes! Here’s why this might be good for you.
If allowed by the Promissory Note or Deed of Trust, and the borrower makes a large lump-sum payment toward the loan principal, he might want to consider a mortgage or loan recast. A mortgage or loan recast is when a borrower makes a large, lump-sum payment toward the principal balance of their mortgage and the lender, in turn, re-amortizes the loan. The lender will then recalculate and reduce the loan to reflect the new balance and the borrower will receive a new amortization schedule. Why should a borrower consider recasting their loan? Well, recasting offers at least these positive benefits:
1. Lower monthly payments;
2. Less interest will be paid over the duration of the loan; and
3. If you initially had a low interest rate, it will remain the same. (It is important to note, however, that if the initial note had a high interest rate, recasting the loan will not impact that rate.)
For some, this might be a more attractive option than refinancing a loan. To compare, if a borrower refinances a loan, the initial loan is completely replaced with a new loan; this can be costly and may negatively impact one’s credit standing. Here’s why some borrowers might find a refinance more appealing:
1. The possibility of a lower interest rate;
2. The possibility of shortening the term of the loan;
3. The possibility of converting an adjustable-rate mortgage to a fixed rate mortgage;
4. The possibility to tap into the home’s home equity; or
5. The possibility to consolidate a debt.
How do you know if either of these options work for you? First, determine what type of loan you have— if you have a FHA loan or VA loan – these loans do not qualify for recasting. Second, make sure that your lender offers recasting – not all lenders do. Third, even if the lender offers recasting, chances are, the lender does not publically advertise this option. Deciding which of these options works best for you might be stressful. If you are considering recasting or re-financing a mortgage or loan and have any questions, feel free to give us a call at (713) 227-7500 or email us at email@example.com.