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.

How First Western Trust Can Help You Find the Right Home Loan

Even in the best of circumstances, finding the right mortgage loan can be an extremely complicated and daunting process. Fortunately, at First Western Trust, we’re here to help. With decades of experience with high-net-worth individuals and a genuine understanding of a family’s financial needs in a constantly changing market. 

Experience With High-Net-Worth Individuals

At First Western Trust, we’re proud to offer a vast array of mortgages for all clients. We have years of experience and have successfully completed mortgages in all fifty states, giving us some of the broadest perspectives on the market today. No matter our client’s financial situation, we’re here to help ensure they get the mortgage product they need, and we guarantee that we offer superior service to every one of our clients.

However, we also understand that high-net-worth individuals have specific requirements and need concierge-level services for managing their portfolios. This high level of needs demands that high-net-worth families partner with a bank that knows how purchasing a home will impact their portfolio. 

For example, a high-net-worth individual may need a jumbo loan to finance their property since it is valued too high for a conventional conforming loan. At the same time, a family may buy a larger home for a growing family. They may also buy a vacation home to spend a summer at or be looking to downsize towards retirement.

For any reason, a person obtains such a mortgage, mortgages for high-net-worth individuals are always more complex than mortgages than average home loans. A high-net-worth family may need to consider various implications of their loans, including how such a mortgage will impact their overall banking services or when it may be appropriate to begin working with a private bank to handle their financial needs.

Types of Loans Offered

Our mortgage consulting team works closely with high-net-worth clients to ensure we find the right solution for their needs. Furthermore, we work closely with our clients at all steps of the mortgage planning process, ensuring they are comfortable with the various financial solutions provided. 

At First Western Trust, we offer many loan types and services. We offer jumbo loans, conventional loans, loans for second homes, portfolio loans, investment property loans, and deed-restricted loans.

This vast array of loan types can be overwhelming, and even the most financially astute of clients may need assistance differentiating the best product for their needs. Not knowing how to identify the right loan is entirely understandable, as mortgages for high-net-worth individuals may have various financial implications, including:

  • How a mortgage will impact tax planning
  • The need to fold in a mortgage with overall estate planning
  • The need to balance repayment of a mortgage loan with investing in the stock market, businesses, and repayment of other debt

High-net-worth individuals need to work with a bank like First Western Trust. At First Western Trust, we have experience working with clients with extremely specific and complex needs. We understand the intricacies and implications these products can have on a portfolio. By working with our clients, we can help them identify which loan best suits their needs and ensure they get a more valuable product than one found at any other national chain of banks. 

More to the point, we also know that our clients demand the highest level of service and as much time as possible to consider a loan’s implications on a portfolio. That’s why we ensure that we provide our clients with as much detail as possible. We always give all closing figures at least 72 hours in advance. Doing so enables our high-net-worth clients to be as prepared as possible for closing. 

Final Thoughts

Jumbo loans, mortgages for second homes, investment property loans and more are major loans that can have a massive impact on the financial future of high-net-worth individuals and their ability to plan their finances for years to come. That’s why a bank with no experience in this area can’t just handle mortgages for high-net-worth individuals.
First Western Trust has years of experience working with high-net-worth mortgage lenders and ensuring that any home loan ultimately fits with the financial future of these individuals. We’re here to fulfill our customers’ mortgage needs and help them get whatever mortgage loan will fulfill their financial planning requirements. Contact a Mortgage Loan Officer today for more information on how we can help you get the mortgage loan that fits your financial future.

Better Understanding the Appraisal Process

These days, more than ever, appraisals can make or break a transaction, or lead to frustration for the parties involved, if not fully understood. Emotional reactions to this objective process can be difficult to avoid, especially if the value conclusion or delivery timelines are not as expected. And while it will never be a “perfect” process, there are three aspects which can help one navigate through conflicts, if better understood by sellers, buyers, and Realtors alike:

• Measurements of square footage can be one of the most frustrating causes of a dispute, as many homes will have multiple measurements taken before the listing (county records and professional services), and these measurements can often conflict with an appraiser’s measurements. For most loan programs, starting in 2022, appraisers will now be required to follow federal ANSI standards (which can be found online), however most counties and others are not used to doing it this way. Knowing the differences can help set the stage for a faster resolution, if there is a discrepancy.

• Most appraisers, especially when inspecting unique or rural properties, will visit a home without completing any pre-emptive research, such as pulling comps, checking county records, or reviewing permit records. As such, it’s not uncommon for an appraiser to visit a property one day, and not have the report completed or delivered for several days afterwards. This is because a bulk of the appraisal process takes place outside of the home, and unless the county record and MLS data is extremely recent and reliable, an appraiser won’t be able to curate the best data without knowing the property inside and out. As such, a lengthy delivery timeline is often a sign of thoroughness – not of laziness.

• Opinions of value differ, sometimes wildly, between an appraiser’s report and that of a buyer, seller, or realtor. However, similar to what makes a “good movie,” or a “great song,” the latter group tends to be more nuanced and subjective than an appraiser’s purely objective stance (in principle). For instance, most Colorado buyers/sellers will agree that there is value in having a south-facing driveway, to reduce shoveling in the winter. But, to an appraiser, there is no way to quantify this in terms of value, and no place on the appraisal to indicate such a feature. Comparable sale data is one of the appraiser’s only tools to derive a value, and sometimes there is just a lack of good data, especially in a rapidly appreciating market.

Understanding these, and other aspects of the appraisal process can help us understand the results better, and hopefully soften the impact of a low value or disappointing report. Either way, at the very least, it can help shed some light on this nerve-racking and often-misunderstood practice; one that is integral to most real estate transactions.

Fixed Rate vs. Adjustable Rate Mortgages

Whether you’re buying your first property or your fifth, a mortgage is a significant financial responsibility. Fortunately, it’s not particularly complicated. There are really only three major components of a mortgage that you need to compare when selecting which one is right for you:

  • Term: the length of time over which you’ll be paying off the loan
  • Amount: the total amount of the loan
  • Interest rate: the interest charged on the loan

Interest rates on mortgages are amortized over the full term of the loan so that you pay the same amount every month, but that amount can vary if your interest rate changes. The interest on your loan will either be a fixed rate or a variable rate, each with its own pros and cons.

Advantages of Fixed Rate Mortgages

The main advantage of a fixed-rate loan is predictability. You’ll “lock in” a rate when you sign the paperwork on your loan, and that rate will apply for the rest of the loan’s term, regardless of external market forces. As a result, you’ll pay the same predictable monthly payment for the next 15 to 30 years.

The total amount of interest paid will depend on the principal and term of the loan. For example:

  • On a $1 million loan at an interest rate of 3.5% over 30 years, you’ll pay a total of $616,560 in interest.
  • On a $1 million loan at an interest rate of 3.5% over 15 years, you’ll pay a total of $286,788 in interest.

We’ve written in more depth about the pros and cons of 15- and 30-year mortgages here, but in either case, a fixed-rate loan means that your rate of interest and monthly payments won’t change.

Pros and Cons of Adjustable-Rate Mortgages

An adjustable rate mortgage (ARM) is considerably more complicated. The basic structure is that your interest rate will be fixed for a set amount of time at the beginning of the loan, usually at a rate much lower than the fixed rate you’d typically receive. After that period, your interest rate will change on a regular basis until the end of the loan. Some important terminology includes:

  • Adjustment frequency: how often your interest rate is adjusted through the lifetime of the loan
  • Adjustment index: your interest rate will typically be tied to an independent benchmark like the rate on Treasury bills, the Secured Overnight Financing Rate (SOFR), the Cost of Funds Index (COFI), or the London Interbank Offered Rate (LIBOR)
  • Margin: on top of the adjustment index, you’ll pay a few extra percentage points. This might be expressed as “SOFR plus 2%” — if the SOFR is 0.5%, you’d pay 2.5% on your loan.
  • Cap: typically, your bank will offer a cap on the amount that your interest rate can rise in a given adjustment period.

Some loans will offer a cap on monthly payments instead, but any unpaid interest in this case is added to the principal of the loan, potentially leading to a loan on which you owe more than you initially borrowed.

  • Ceiling: the highest number that your interest rate can reach during the lifetime of the loan.

During the initial fixed period, an ARM is typically much cheaper than a fixed-rate mortgage, allowing you to qualify for a larger loan. In an environment where interest rates are likely to fall, you might even benefit from lower monthly payments later in the loan. 

That same volatility can work against you, though. If rates climb, your monthly payment could skyrocket in just a few years. The Consumer Financial Protection Bureau has taken steps to prevent predatory loans that might result in astronomical increases in monthly payment, but there’s still an inherent risk.

Is an Adjustable-Rate Mortgage Right For You?

There are a few situations where an ARM might present significant advantages:

  • Falling interest rates: during economic booms, interest rates tend to rise. If you’re buying at what you think is a peak in interest rates, you might benefit from falling rates a few years down the road without needing to refinance. 

As of the middle of 2021, we’re in the exact opposite situation. Interest rates are as low as they’ve been for nearly 70 years, so signing an ARM in the hopes that they’ll fall is ill-advised.

  • Short-term ownership: if you’re planning on living in your house for significantly less than the life of the loan, you might benefit from the lower introductory rate of an ARM and sell before rates go up.
  • Higher future earnings: if you’ve recently graduated from med school, law school, or obtained an MBA, you’re likely to see a significant bump in income in the next few years. An ARM will allow you to borrow a higher amount at your current, lower income, and when your monthly payments go up, you’ll be able to afford them with your predicted future income.
  • Early payment: if you have the cash on hand (or are likely to in the near future) to pay off your mortgage early, an ARM might be right for you. For example, you might buy a new house with a two-year ARM, sell your old house, and use the proceeds from your old house to pay off the remainder of the loan on the new house before the interest rate rises. You could also do the same with an inheritance or the sale of a business.

Talk to First Western Trust Bank

No matter what your situation, an ARM is something you should consider carefully before signing. At First Western Trust Bank, we can combine our in-depth knowledge of the state of financial markets and interest rates with a holistic examination of your personal finances and goals. The end result is a tailored recommendation and loan that’s right for your circumstances both now and years down the line. If you’re ready to start looking at mortgages, get in touch with First Western Trust Bank today.