What is it, how does it work

If you’re a homeowner looking for a way to lower your monthly budget and have a lump sum you can use, a mortgage overhaul might be a good option.

How a mortgage overhaul works

If you end up with a large sum of money, a mortgage overhaul allows you to pay off your mortgage principal and save money by lowering your monthly payments on the remaining balance.

The simplest way to think of a mortgage overhaul is as an “overhaul.” You pay the same interest rate and recalculate the loan using the same repayment terms. Only the financed amount and your monthly payment change. Because you owe less money, you also end up paying less interest over the life of the loan.

If you instead used that same money for the principal of the loan, you would reduce the amount you owe but, unlike the overhaul, the monthly payment would remain the same.

Mortgage Overhaul Details

Although it may take 45-60 days for a mortgage lender to carry out a redesign, it is relatively simple. Ideally, as long as your loan is in good standing, the lender will not require Credit check, home appraisal or income verification.

Mortgage overhaul is only available on conventional loans, and is not an option for FHA, VA, or USDA loans. Jumbo loans are also generally ineligible. Most, but not all, lenders offer a mortgage overhaul. Call your lender to find out if this is a service they offer.

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The amount of money you will need to spend on the overhaul is usually at least $10,000, depending on the lender. What is important is that the initial term of your loan and interest rate remains the same. For example, if you have a 30-year mortgage at an interest rate of 3.7% and you recast it after five years, the balance will be re-amortized over the remaining 25 years using the same rate.

Once you’ve applied for a mortgage recast, your lender will likely require you to make two consecutive payments (in the amount of your original payment) before recasting the loan. That said, you should continue to make your regular payments until you hear back from your lender.

You can recast your loan as many times as you want, but remember to expect a recast fee of around $250 to $300.

Benefits of mortgage overhaul

In addition to lowering your monthly mortgage payment, here are a few reasons why you might want to explore overhauling your mortgage.

  • If the interest rate has gone up since you took out your original mortgage, you can keep that lower rate.
  • You will pay less interest overall due to a smaller principal amount.
  • You can reduce your monthly mortgage payment without extending the term of the loan.

You can also build an emergency cushion by recasting your mortgage and continuing to make your down payments. This will further reduce your capital and if you are having financial difficulty you can switch to lower payments until you are back on solid footing.

Disadvantages of mortgage overhaul

While there are specific circumstances when it makes financial sense to recast a mortgage, recasting is not without its downsides.

  • If your current mortgage rate is high, it doesn’t make financial sense to recast it at the same rate. examine refinancing to see if you can qualify for the lower rates.
  • It is possible to become rich house and the cash poor by putting all your funds into your home equity, leaving little money for other important goals.
  • If you have high-interest debt, paying a lump sum on your mortgage could be a costly mistake. The smart decision is to eliminate high interest debt first.

Mortgage Overhaul Alternatives

If your goal is to use a lump sum of money as wisely as possible, a mortgage overhaul is just one option. Here are some others of note:

  • Pay a little extra for your mortgage principal each month. This will not immediately reduce your monthly obligations, but will help you pay off the debt sooner.
  • Refinance your mortgage by taking out a new loan to pay off the old one. Refinancing may be your best option if the current interest rate is lower than your original rate. While remortgage simply recalculates your payment based on the new, lower principal amount, refinancing is much like taking out a new mortgage. You may need to pay application, credit, origination, flood certification, title search and registration fees. You will also be required to have a new home appraisal, and possibly, another home inspection.
  • Use the money to make investments in the stock market that could offer a higher rate of return over the long term.
  • Build a emergency fund enough money to pay three to six months of bills. This way you know you have money in reserve to overcome life’s obstacles and can focus on other more important things.

Mortgage overhaul may not be a term you’re familiar with, but it should be. It’s good to have as many tools as possible in your financial arsenal. And redesigning can be a good way to lower your overall mortgage costs and monthly payments.

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