Once you become a homeowner, you will make monthly mortgage payments. As you pay back your loan, you may have the option to lower your monthly mortgage payment. There are a few ways to potentially lower your monthly payment and interest rates, but it’s important that you choose the option that works best for your financial situation. The most common option is to refinance your loan.
Refinancing is the process of financing your existing loan over again, but with new loan conditions. When you refinance your mortgage loan, you replace your loan with a new one. However, this doesn’t mean you get rid of your debt. Instead, you move it to a new loan, with new terms.
The main reason a homeowners would refinance their mortgage loan is to get a better interest rate and term. For example, you could refinance your adjustable-rate mortgage loan to a fixed-rate mortgage loan, or refinance to a lower interest rate when they fall.
To refinance, your lender will look at all the factors they considered when you got your first mortgage loan, like your credit history and credit score, your debt-to-income ratio (DTI), and funds you have available for a down payment.
A less common option that could potentially lower your monthly mortgage payment, which is more rarely advertised, is called mortgage recasting.
Mortgage recasting is when you pay down a large part of your loan balance, either through one large sum or through making regular, extra payments, and then change your existing mortgage loan. To recast your mortgage loan, your mortgage lender will re-calculate your monthly payment using your lower loan balance. This means that you will pay less every month, because the principal balance of your loan will be smaller.
Recasting your mortgage loan should be a fairly simple process. However, your lender will usually charge a fee for recasting your loan.
Unlike with refinancing, there are little borrower requirements for recasting. When you originally got your loan, your lender looked at a number of factors to determine what you qualified for. As we mentioned before, they’ll look at these same things if you refinance. However, it’s different when you recast your mortgage loan. A lender may require that you’ve paid a certain amount of your loan back before they’ll consider you for recasting. This is because when you request to recast, you already have the home loan — you’re simply asking for a re-calculation of the amortization schedule. Keep in mind that not all loan types allow for mortgage recasting, such as VA and FHA. Check with your lender to see if your loan type is eligible.
So, which one is right for your financial situation?
Refinancing could be a good option for you. Some pros of refinancing include:
There are also some cons associated with refinancing your mortgage loan:
The obvious positive to recasting is that you can reduce your monthly payment, but here are some other pros:
Cons of recasting include:
If you’re looking for a lower monthly mortgage payment, refinancing or recasting could help you do that. Even once you have a home loan, the mortgage industry and loan process can still be confusing, especially if you’re looking to refinance or recast your loan. Talk through any questions or concerns you have with your mortgage lender. They can help you decide what’s right for your financial situation.