What is mortgage loan overhaul?
If you’re a homeowner looking for a way to lower your monthly mortgage payments and have a lump sum amount you can use, mortgage redesign might be a good option.
How the mortgage overhaul works
In the event that you end up with a large sum of money, mortgage overhaul allows you to pay off your mortgage principal and save money by reducing the monthly payment on the remaining balance.
An easy way to think of a mortgage overhaul is to think of it as an overhaul. You pay the same mortgage interest rate you had before and recalculate the loan using the same repayment terms. The only thing that changes is the amount financed and your monthly payment. Because you owe less money after making a lump sum payment, you also end up paying less interest over the life of the loan. The ability to pay less interest can be the most attractive feature of a loan overhaul.
If you instead put that same money in the principal of the loan each month, you still reduce the amount you owe, but unlike the recast, the monthly payment would stay the same.
Mortgage overhaul details
Although it can take 45 to 60 days for a mortgage lender to complete a redesign, it is a relatively straightforward process. Ideally, as long as your mortgage is in good standing, the lender won’t require a credit check, home appraisal, or income check.
Mortgage overhaul is only available for conventional loans and is not an option for FHA, VA, or USDA loans. Jumbo loans are generally ineligible. Most lenders, but not all, are offering mortgage overhauls. After all, making mortgage redesigns easier for existing customers is one way to prevent them from refinancing the mortgage with another lender. The only way to know for sure if your lender is offering a mortgage overhaul is to call the company.
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 term and the interest rate of your original loan remain the same. For example, if you have a 30-year mortgage with an interest rate of 3.7% and you rewrite it after five years, the balance will be amortized over the remaining 25 years using the same rate.
After you’ve applied for a mortgage recast, your lender will likely ask you to make two consecutive payments (of your original payment amount) before you recast the loan. That said, you should continue to make your regular payments until you hear from your lender.
You can recast your loan as many times as you want, but don’t forget to allow for a recast fee of around $ 250 to $ 300.
Benefits of mortgage redesign
In addition to lowering your monthly mortgage payments, here are a few reasons why you might want to explore mortgage overhaul.
- If the interest rate has increased since you took out your original mortgage, you may be able to keep that lower rate.
- You will pay less interest overall due to a smaller principal amount.
- You can lower your monthly mortgage payments without extending the term of the loan.
You can also build up an emergency cushion by consolidating your mortgage and continuing to make your initial payments. This will lower your principal balance even further, and if you run into financial difficulties, you can switch to lower payments until you are back on solid ground.
Disadvantages of the mortgage overhaul
While there are specific circumstances in which it makes financial sense to recast a mortgage, recasting is not without its drawbacks.
- If your current mortgage rate is high, it doesn’t make financial sense to rebuild it at the same rate. Instead, consider refinancing your mortgage to see if you can take advantage of the lower rates. If you like your current mortgage agent, ask them what the interest rate would be if you refinanced the existing mortgage through them.
- It is possible to get rich in house and poor in money by putting all of your funds in the equity in your home, leaving little money for other important purposes.
- If you have high-interest debt (like credit card debt), paying a lump sum on your mortgage – instead of your other debt – could be a costly mistake. The best solution is to pay off credit card debt and other high interest loans first.
Alternatives to the mortgage overhaul
If your goal is to use a sum of money in the most efficient way possible, mortgage redesign is only one option. Here are some more worth considering:
- Pay a little more for your mortgage capital each month. It won’t lower your monthly obligations immediately, but it will help you pay off debt sooner and can save thousands of dollars in interest payments.
- 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 for which you are eligible is lower than your original rate. While redesigning a mortgage simply recalculates your payment based on the new, lower principal amount, refinancing is a lot like taking out a new mortgage. You may need to pay application, credit, origin, flood certification, title search, and registration fees. You will also need to do a new home appraisal and possibly another home inspection. Again, if you have a good relationship with your current lender, check their interest rate as you rate the store. Use our mortgage interest calculator to see how an interest rate change can affect your monthly payment.
- Use the money to invest in the stock market. This could provide a higher rate of return in the long run.
- Build an emergency fund with enough money to pay off three to six months of bills. This way, you know you have money in reserve to overcome future obstacles down the road, and you can focus on other more important things.
Mortgage overhaul may not be a process you’re familiar with, but it should be. It’s good to have as many tools as possible in your financial arsenal. And redesign can be a great way to lower your overall mortgage costs and your monthly payments.