Discover How to Use a Recast Loan to Solve Your Down Payment Dilemma
Are you one of the many sellers whose home has not yet sold, but you are excited to close escrow on your next purchase?
Sellers in this quandry often face the decision of using their personal savings to meet the minimum required down payment in order to close the new purchase, and then refinancing after their existing home sells in order to replenish their savings and reduce their mortgage payment. The problem with this has been that the cost of refinancing could run into the thousands.
The other option is to wait on the new purchase until their home sells. In this market, that could take a few months depending on several factors. And, for those that are looking at all of the great inventory choices for Laguna Beach Homes for Sale, you may not want to risk missing out on that perfect home that has just hit the market.
Now, according to information from Kevin Budde from Bank of America, there is a third option.
If you are able to use your savings to close your new purchase now, you could possibly recast that loan once your present home sells. Depending on the amount used, your payment could be lower.
Let’s see how this could work:
If you were purchasing a home at the price of $500,000 and had an amount in savings equal to 10%, or $50,000, you may be able to close your new purchase (depending on lender guidelines, etc.) with a loan of $450,000.
Then, when you sell your existing home, lets say that your proceeds were $100,000. You could use $50,000 of this amount to replenish the money that you used from savings, then apply the additional $50,000 to your mortgage through a recast, reducing that balance to $400,000 and thus reducing your monthly mortgage payment.
This is just another option to consider. If you believe that you could benefit from this, be sure to check with your lender to get all the details in relation to your personal financial scenario.
Here is the full information from Kevin Budde of Bank of America:
Recasting of Amortizing Loans
A recast is a modification of a loan that can be completed when a large sum of money is applied to principal. A recast occurs when the principal balance of a loan is reduced and the subsequent payments are calculated using the lower principal balance. The recast does not shorten the term of the loan; however, it does lower the amount of the payment and the principal balance of the loan.
As an example, if a buyer who’s existing home hasn’t sold and was using the proceeds for the down payment, may choose to close escrow on his new purchase using funds from savings. Once his home for sale closes he will want to replenish his savings and use the rest of the proceeds to lower the principal balance to the originally planned loan amount. Most borrowers are under the belief they will need to refinance the existing loan and apply the additional proceeds in order to lower the monthly payment. This is where recasting becomes the solution.
If the borrower were to refinance they would incur thousands of dollars of costs. In addition, the interest rates may be higher which would also be a problem. By requesting a recast from the servicer of the loan the borrower is able to lower his monthly payment and not have to be concerned with costs or higher interest rates.
Recasts are permitted on FNMA and FHLMC loans. Recasting is not permitted on FHA or VA loans. Typically, one recast is allowed per year and no minimum principal reduction amount is required.
