Often times, seemingly in a fantasyland, home buyers might want to buy their new home first non-contingent on a 
home sale and sell their retained home shortly after moving into their new one without a financial inconvenience. They might want to do this to get a better price due to negotiating from a position of strength or it might simply be a matter of logistical convenience. Whatever the reason, the difficulty arises when they want to use the equity from the home that they’d be selling to achieve a lower payment on their mortgage for their new home. Most would suggest that can’t happen and that, if they want the lower payment, they’d have to sell their current home first or immediately refinance their new mortgage. This is incorrect. It may seem that a buyer like this wants to have their cake and eat it too but the fact of the matter is that they can; by using a mortgage recast.
What is a mortgage recast?
A mortgage customer who already has their loan closed and is currently being serviced can often elect to apply a lump sum of money against their existing principal balance and, rather than simply reducing what they owe on the loan, they end up with a reduced monthly payment. This is achieved by paying a small fee, usually somewhere between 200 and 500 dollars and the consenting lender and loan servicer will keep the loan term and interest rate the same but by re-amortizing the existing mortgage using the new and reduced loan amount, the resulting payment is less. In some cases considerably less. Most lender and loan servicers that offer this have a minimum amount that they require towards the principal balance before they’ll allow it (usually more than 5,000 and often 10,000 dollars or more).
Click here for a sample lender policy on mortgage recasts
How do I use a mortgage recast to plan my home purchase?
Firstly, assume there’s a small down payment on the purchase due to most of the home buyer’s down payment being trapped in the equity of the current home that’s not sold yet. Therefore, the purchase would need to be structured using conventional financing (as an example) with single premium financed private mortgage insurance to ensure that they buyer won’t end up with a mortgage that has monthly mortgage insurance or a any pricing hit that would come with a higher rate (as would be the case with any other type of PMI that doesn’t charge the borrower on a monthly basis). This would require at least a 5% down payment on the purchase.
The best way to illustrate all of this is in an example using some mortgage recast calculators and a hypothetical transaction. Here are the assumptions for our hypothetical:
- 300,000 purchase for the new home
- 100,000 equity from sale of the old home after purchasing the new one
- Note rate of 4.75 on a 30 year fixed rate mortgage for the purchase of the new home
In this case, the purchase would leave a loan amount of 291,000 dollars after the initial down payment and financed PMI buyout. Initially, the principal and interest payment using our assumptions would be 1517.99 dollars per month. Fast forward a few months until the sale of the previous property is concluded and the net proceeds of 100,000 are in hand. Now, the mortgage recast is requested and the payment would be reset at the new balance of 191,000 and a new payment of 996.35 (over 500 dollars less) and all of this with the security of the same interest rate and no costly refinancing.
Click here for an amortization calculator for the mortgage before and after the recast
Click here for an interactive recast mortgage calculator where you can run your own scenarios
So when a home buyer is hungry for some cake but can’t find the plate and fork, they should consider a possible mortgage recast in the planning of their purchase and they’ll find themselves well fed. And all of that with a much smaller bill at the end of the meal.
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