The Benefits of a Mortgage Recast

Homeowners understand that their monthly mortgage payment is based on the initial down payment and the loan term. Many homeowners who acquired a mortgage with high-interest rates often seek to refinance when interest rates drop. Others attempt to pay off their mortgage quicker by paying more toward the principal each month. Both options are viable solutions for reducing the amount of the monthly payment. A third option is a mortgage recast, which is a particularly beneficial solution when interest rates are high.

What is a Mortgage Recast?

Put simply, a recast mortgage is a mortgage that has been recalculated to reduce the monthly premium. When recasting mortgages, a lender will calculate a homeowner’s new monthly payment based on the outstanding balance and the number of years remaining on the mortgage.

A mortgage recast should not be confused with a mortgage refinance. Refinancing a mortgage means creating a new loan with a new interest rate, a new term, or both. But refinancing isn’t always a possibility when interest rates remain high. Additionally, many lenders charge closing costs for a refinance.

With a recast mortgage, a new loan is not created, and the interest rate on the loan does not change. Instead, the monthly payment is recalculated, and the remaining loan term and any equity in the home also remain unaffected.

Benefits of a Mortgage Recast

The primary benefit of a recast mortgage is, of course, lower monthly mortgage premiums. But there are many additional benefits to recasting mortgages, including:

No Credit Check or Lengthy Paperwork Processing

When a homeowner refinances a mortgage, a lender will perform a credit check. Typically, additional paperwork is required that is almost on par with the paperwork necessary for a standard mortgage. And while many lenders have facilitated the process, it can still take time for everything to be fully processed. However, there is no credit check requirement with a mortgage recast, and the process can be completed much faster.

No Closing Costs

Another significant benefit of recasting a mortgage is no closing costs. There may still be a fee for a mortgage recast, but it is far less than the closing costs for a refinanced mortgage. Depending on the lender, the fee may be only a few hundred dollars. 

Less Money Paid Towards Interest

A mortgage recast means not only lower monthly payments but also less interest paid as well. Mortgage recasting reduces the actual interest paid over the life of the loan, which decreases the total amount of the loan overall.

The Loan Term Remains the Same

When refinancing a loan, it is common to increase the loan term. For example, a homeowner who has already paid a loan for five years on a 30-year loan and then decided to refinance will likely start over with a new 30-year loan term.

Things to Know Before Recasting a Mortgage

While the benefits of a recast mortgage certainly seem great, there are some things to be aware of before homeowners opt for this solution.

The Interest Rate Remains the Same

Homeowners seeking to take advantage of lower interest rates when they have a mortgage with high interest cannot do so with a mortgage recast. The interest rate remains the same. However, recasting a mortgage can be a great option if interest rates are still high or have risen even higher than the homeowner’s current rate. It might also be prudent to look at other non-traditional mortgage options designed to fit the needs of homeowners focused on wealth planning.

Cannot Access Home Equity

When a homeowner refinances, they often can refinance the loan for a larger amount — essentially tapping into their equity to receive extra cash. Refinancing the loan for a larger loan is not an option when recasting a mortgage. 

Not Available with All Lenders

Not all lenders offer a mortgage recast option. Additionally, not all types of loans are eligible, and there may be restrictions depending on the current state of the mortgage.

Final Thoughts

A mortgage recast might be a better option for some. One of the best ways to determine if recasting a mortgage is the smart thing to do is to figure out the ultimate purpose of your current loan. Are you simply seeking to lower your monthly payment? Or do you have plans to access some of your home equity? Do you want to use the savings from a mortgage recast to improve your future wealth planning potential, or do you wish to take advantage of a much lower interest rate?
Homeowners that want to know how to recast a mortgage and whether it is a good option for them can contact First Western Trust to learn more. First Western Trust specializes in providing customized mortgages and understands the unique financial situations of its clients. With several lending options and a highly experienced team of professionals, First Western Trust is ideally suited to help with a mortgage recast and other home lending needs.

Home Refinancing Strategies in High-Interest Rate Environments

Interest rates remain high for fixed-rate loan mortgages. These market trends could lead to significant increases in monthly payments and debt-to-income ratios for future borrowers. During such times, homeowners looking to refinance a mortgage might benefit from seeking alternative options to traditional fixed-rate mortgages. Through collaboration with a seasoned financial institute, it is possible for homeowners to find lower rates while most of the market deals with a high-interest rate environment. 

However, some transitory refinancing solutions or mortgage products may lead to costly expenses in the long term. Therefore, homeowners must understand each available solution before signing on the dotted line. Buyers can tap into several mortgage refinancing alternatives to minimize the toll of high-interest rates. 

Apply for Adjustable-Rate Mortgages (ARMs)

ARMs are essentially mortgage arrangements that gradually deviate from a fixed interest rate in home loan refinancing. ARMs begin with a fixed interest rate and adjust across a six-month or annual period. While ARMs once had fixed-rate periods of less than three years, these have increased recently to provide improved financing stability.  

For example, a mortgage provider might offer a 7/1 ARM arrangement. Under this agreement, the borrower services a fixed rate for the first seven years and an adjusted final term. In a 3/3 ARM, homeowners service a fixed loan for the first three years and an adjustment for the remaining three years. 

Lending institutions can help guide homeowners through various ARM options based on their needs and priorities. While ARMS offer lower initial payments, it is essential to note that future adjustable interest rates can spike based on market and economic changes. 

Homeowners should check with their lenders regarding exact ARM practices, as some policies offer cutoff amounts that protect against significant interest increases. Also, it is important for borrowers to make the necessary financial plans for servicing higher-adjusted loans that may occur in ARM arrangements. 

Discuss Loan Assumption Options

Buyers who can afford higher cash down payments may consider taking over the remainder of a fixed mortgage term from current homeowners to avoid high-interest market rates. The process, known as loan assumption, allows buyers to take over a property owner’s original term conditions in home loan refinancing. 

However, loan assumptions usually involve substantial paperwork to address various changes that originate from the start of the loan. A trusted lender can help sort through the details, such as accounting for the difference between sales pricing and outstanding loan balances. 

Leverage Home Equity Line of Credit (HELOC) 

A HELOC is an effective method of refinancing home payments during high-interest periods. The revolving loan type allows borrowers to secure a loan against up to 85%–90% of their home equity. According to the Consumer Financial Protection Bureau (CFPB), nearly a million consumers borrowed against home equity in Q2 2022. 

A HELOC offers an adjustable interest rate, where borrowers can tap into the funds via a line of credit for an agreed draw period. HELOC draw periods usually span 5–10 years and depend on financial assessments conducted by the lender, which may include a homeowner’s creditworthiness and the home equity value of a property. 

The HELOC process lets homeowners leverage their equity without replacing current low-interest mortgages with higher-interest cash-out refinances. While HELOCs can help homeowners leverage their equity in high-interest environments, these lines of credit carry some risks. 

It is important to discuss other potential risks and fine print associated with the loan type with a trusted lender before proceeding with the arrangement. For example, since HELOC relies on home equity, borrowers face the danger of foreclosure if they fail to repay the loan based on agreed-upon terms. Also, buyers may feel tempted to borrow additional funds from their HELOC for personal spending, resulting in debts and financial challenges down the road. 

Consider Temporary Interest Rate Buy-Downs

Financial institutions may recommend a temporary buy-down for home loan refinancing in high-interest environments. A temporary buy-down usually involves an additional initial payment in exchange for lower interest rates down the mortgage life cycle. Lenders may extend the discounted interest rate for a few years before reverting to the original values. 

For example, a borrower might request a buy-down at 3.5% for the first two years of a 15-year mortgage loan with a 5% interest. When opting for a buy-down, it is essential to consider factors like the total upfront cost and buy-down period to determine the best long-term outcome. 

Broaden Refinancing Options

Owners may go beyond mortgage refinance options in home loan refinancing by exploring different sales transactions. For example, individuals may consider contract-for-deed arrangements and private mortgages, where sellers and buyers negotiate the interest rates and related terms between each other for a property transaction. These privately settled arrangements may also include late payment provisions and penalty arrangements. 

Engaging in these unconventional financing options requires close attention to the legal agreements to avoid balloon payments and other factors that could result in high-interest rates in the long run. 

Final Thoughts

First Western Trust offers mortgage services for optimized outcomes across different settings, including high interest rate environments. The experienced team applies years of expertise to personalize banking services and diversify investment portfolios for enhanced wealth planning and strategic methods to refinance home loans. Those who partner with us have access to maintaining a loan within our portfolio loan program. Being a part of our program allows us to underwrite cash flow and be more creative than most brokers which can make a significant difference in helping you obtain the right loan to meet your needs.
Reach out to First Western Trust’s mortgage team to discover the most suitable strategies to refinance your home today.