Understanding Mortgage Recasting – Real estate investors are constantly looking for ways to save money, increase cash flow, and expand their real estate portfolio. One way some investors accomplish this is through something called a mortgage review.
Remortgage is a strategy available to most property investors, but is remortgage a good idea? Just like refinancing an investment property mortgage, there are pros and cons. Investors should understand how mortgage changes will affect them before making a decision.
Understanding Mortgage Recasting
In this article, we’ll discuss how to switch mortgages and the pros and cons of switching mortgages so you can decide whether this strategy is right for you.
Ways To Be Mortgage Free Faster
Simply put, a mortgage modification is an adjustment to the monthly payment on an investment loan. This does not change any terms of the loan, such as the interest rate or loan term. However, it may lower your monthly payments, making it an attractive option for real estate investors looking to increase their cash flow.
If you’re wondering how to reduce your monthly payments without extending your investment loan or refinancing term, the answer is:
By paying principal upfront, you have the option to re-amortize or adjust your monthly payments to accommodate a lower principal. This is what recycling does. Without a mortgage review, a prepayment will not reduce your monthly payment. Instead, it simply shortens the loan term.
Essentially, repaying the principal owed on your loan is what you do during a mortgage review. However, remortgaging requires additional revaluation steps to adjust the monthly payments.
What Are Mortgage Processing Fees?
It’s possible to pay off the principal of a debt without rescheduling, and we’ll give you an example to better understand the merits of each.
Let’s say you owe $200,000 on a 30-year fixed-rate mortgage with monthly payments of $1,000 and an interest rate of 4 percent. You’ll pay $50,000 in principal on the loan. You do that, and then you change your mortgage. The new monthly payment is approximately $750, a $250 reduction from the original payment. Additionally, you’ll save approximately $32,000 in interest over the life of the loan.
Now let’s say you decide not to review your mortgage. With the same $200,000 loan, a 4% interest rate, and a $50,000 principal down payment, you would save approximately $70,000 in interest over the life of the loan.
As you can see, paying principal saves the most money. As you repay the principal, your payments will be applied to the end of the loan, shortening the term of the loan. As loan repayment terms shortened, accrued interest decreased significantly.
Scheduled Recast Definition
When you change your mortgage, you keep the same loan term. As your principal decreases, so does the interest you pay. However, the longer the term, the higher the interest charged on the loan.
If your goal is to save money, it may be worth paying down the principal on an investment property mortgage. However, mortgage rescheduling has its uses.
Paying off the principal early will save you the most money in the long run on this particular investment property. But it won’t increase your cash flow. Having more cash can make real estate investors rich. Therefore, paying off the principal won’t allow you to grow your real estate portfolio as quickly as a mortgage loan.
If you have money to invest in loan principal and are wondering whether you should consider a mortgage modification, consider the following factors:
What Is Mortgage Recasting? Why Are People Using It, And Is It A Good Option For Me?
Going back to the example mentioned above, if you think saving an additional $38,000 in interest makes financial sense, you may want to reconsider. By focusing on immediate cash flow growth, you can quickly save money on your new investment property.
Taking out a smaller mortgage and saving money on interest is great, but it may not be as good as owning more real estate. Especially if each of your new properties has a high return on investment, which is easy to achieve using real estate investing software.
Imagine being able to purchase another property as a result of changing your mortgage and reducing your monthly payments. Let’s say, this new investment property can generate $15,000 or more per year. You may recoup the cost of the additional interest payments after just a few years. In the long run, additional possessions will pay off:
Overall, mortgage modifications are a great strategy for investors looking to increase cash flow and build a real estate portfolio quickly.
Pay Off Mortgage Vs Invest Calculator
An easy way to find out whether a mortgage modification may be beneficial to you is to use a mortgage modification calculator. Everyone’s specific situation is different. Therefore, investors should do their math and familiarize themselves with the rules governing their particular loan before considering a modification.
No matter which strategy you choose, make sure your investment decisions are informed by real estate investing data and tools. To learn more about how we can help you make faster, smarter real estate investment decisions, click here. A scheduled revision is a recalculation of the principal and interest payment schedule for the remaining mortgage loan. A mortgage is a loan that a bank lends to a borrower to purchase a home. Processing is performed on a predetermined or scheduled date.
Some mortgage programs allow homeowners to prepay a loan that is not fully amortized, meaning the payments will not reduce the principal owed. Then, on the scheduled rollover date, a new amortization or payment plan is calculated based on the then-current principal balance and remaining term (or remaining time to maturity).
Periodic reviews are important as it helps ensure that the mortgage is paid off before the end of the original term. However, a reconsideration of the plan may result in an increase in the payment amount for the remaining payments.
How Do I Recast A Mortgage?
A mortgage review is an option included with some mortgages that can reduce the interest rate and extend the remaining mortgage term. In some cases, borrowers can make principal payments to reduce the outstanding loan amount. The loan payment schedule can be redone, which will create a new payment schedule to reflect the reduced loan amount.
A mortgage repayment schedule called an amortization schedule in which part of each payment is applied to the interest due and the outstanding principal. The scheduled review date is the date when the lender calculates a new repayment and amortization schedule based on the remaining principal amount and term of the mortgage. In other words, the outstanding balance is divided by the current loan term to calculate the monthly payment.
If the principal payment is reduced, the borrower will most likely expect a reduction in monthly payments following a scheduled mortgage review. Many mortgage providers offer periodic repayment plan revisions if the borrower makes additional payments to reduce the principal owed. However, lenders usually require the loan to be in good standing, meaning there are no late payments.
A mortgage review may be a better option than mortgage refinancing. In a refinance, the current mortgage is replaced by a new mortgage, usually when market interest rates are lower than the original loan rate. However, since a refinance is technically a new loan, there can be expensive additional fees, and loan approval depends on the borrower’s creditworthiness.
Mortgage Recast: Definition, How It Saves You Money
A mortgage modification, on the other hand, is not a new loan and therefore does not require a new approval or credit check from the borrower. In contrast, a modification changes the loan payments but does not replace the original mortgage.
An adjustable-rate mortgage (ARM) is a mortgage in which the initial interest rate is fixed for a period of time, after which the interest rate resets based on current market rates. There are different types of ARMs that allow the borrower to pay interest only for a specific period or to adjust the payment amount over the life of the loan.
Periodic changes are typical with adjustable rate mortgages. A payment option ARM is a monthly adjusting ARM that allows the borrower to choose:
Payable ARMs have a feature that allows deferred interest to accumulate. Deferred interest accrued on each payment date is added to the principal balance of the mortgage. This is called negative depreciation. Typically, at the end of the fifth course, a review date is assigned. On this updated date, the amortization schedule will be recalculated so that future payments will amortize the mortgage over the remaining term based on the then-current principal balance and fully indexed interest rate.
The Benefits Of A Mortgage Recast
Adjustable-rate mortgages, including adjustable-rate ARMs, allow borrowers to make lower payments, which can help improve affordability. However,