- A mortgage overhaul allows you to pay off a large portion of your mortgage all at once and have your loan re-amortized, resulting in a lower monthly payment.
- You will need to make a substantial payment to qualify for a redesign. Lenders can charge as little as $5,000 or more than $25,000.
- Recasts are not available on government backed mortgages.
If you have extra money that you’d like to spend on paying off your home, doing so through what’s called a redesign can help you save money each month without having to go through the hassle of refinancing.
But there are limits to your ability to recast your mortgage, and those with certain types of loans or little equity might not have the option.
What is a mortgage overhaul?
A mortgage overhaul occurs when a borrower makes a large lump sum payment for their remaining mortgage balance and the lender re-amortizes the loan, calculating a new monthly payment based on the now lower balance.
All mortgages follow an amortization schedule. Amortization is a complex word that simply refers to the repayment of the mortgage over a fixed term. For example, if you borrow $200,000 to be repaid over 30 years with an interest rate of 5%, you would pay $1,074 each month to repay the principal in full with interest.
How mortgage overhaul works
When you apply for a mortgage overhaul, you will use the funds you have allocated for it to pay off part of your mortgage principal. Your lender or managing agent then recalculates the amount you need to pay each month to fully pay off your balance by the end of your loan term.
Because you now owe less on your mortgage, a redesign will mean a lower monthly payment.
This differs from prepaying your mortgage, which reduces the time it will take you to pay off your loan, but does not decrease your monthly payment. Some borrowers will make a few extra mortgage payments each year or prepay a lump sum without asking for a recast to pay off their mortgage faster.
If your main goal is to save money on interest, you might want to consider prepaying rather than repaying.
“Our analysis is that if someone is simply looking to save on ‘total loan interest term’ payments, then paying off the principal balance early without recasting your mortgage will save you over the life of the loan” , says Shmuel Shayowitz, President and CEO. loan officer at Approved Funding.
The redesign will also allow you to save on interest, as you reduce the amount of money you will pay interest on. But prepayment without overhaul has the advantage of both reducing your balance and shortening your term.
Advantages and disadvantages of overhauling your mortgage
Whether a redesign is right for you depends on your goals, your budget to pay the required amount and fees – and if it’s even an option for you to do so.
The biggest benefit of overhauling your mortgage is that you’ll have a lower monthly payment, which can give you more wiggle room in your budget each month for other things. The only other way to lower your monthly payment is to refinance, which takes time and costs money.
A redesign is also beneficial if you’re generally happy with the terms of your mortgage and don’t want to lose your current interest rate or reset the term of your loan.
While it may be financially beneficial to recast, not everyone has the ability to do so. Even if you have a loan and a lender that allow the recast, you may struggle to meet your lender’s minimum principal reduction requirements.
If you have a large sum of money, locking it into your home equity may not be your best option. Ask yourself if this money could do more for you in your retirement savings or in a brokerage account.
A mortgage overhaul can be really beneficial if your current monthly mortgage payments are straining your budget. But depending on your situation, you may be better served by other options, such as prepaying your mortgage or refinancing.
Mortgage overhaul vs refinance
A mortgage refinance can help you achieve similar goals as a redesign, but it requires a little more work on your part.
When you refinance, you replace your current mortgage with a new one. Borrowers can get a rate and term refinance to change the interest rate or term of their current loan, or a cash refinance to take equity out of their home.
It costs money to refinance, and you’ll probably have to go through a credit check and get a new one.
to be approved. But if you need to lower your monthly payment and don’t have enough money to qualify for a refinance, refinancing may be your best option.
With refinancing, you can only lower your monthly payment if you get a lower interest rate or refinance on a longer loan term (for example, if you have 25 years left on your current mortgage and you refinance over a new term of 30 years). Remember that the longer it takes to pay off your mortgage, the more interest you will pay in the long term.
Whether a redesign or refinance makes more sense for you depends on your goals, your finances, and the economy. When rates are low, a refinance might be the best option. But if you want to keep your current rate and lower your monthly payments, an overhaul is probably the best bet, provided you have the funds.
How to calculate your mortgage overhaul
The easiest way to determine what your new monthly payment would be after your mortgage overhaul is to use an online amortization calculator or contact your lender.
If you use an amortization calculator, you need to know the following:
- What will your loan balance be after you make your lump sum payment
- How many years do you have left on your mortgage
- Your current interest rate
You will enter this information and the calculator will tell you what your new monthly payment will be and how much interest you will pay over the life of the loan. Compare that number to what you’re currently paying each month to decide if the redesign is worth it for you.