To reduce payments, rebuild your mortgage
When Hollywood directors remake a role in a movie, they tend to be quiet about it. Mortgage lenders are also silent on the overhaul.
A recast refers to a borrower who makes an additional principal payment and then asks the bank to amortize the loan at the existing interest rate. The result is that even though the term of the loan remains the same, the monthly payments are reduced.
and Quicken Loans offer mortgage remodels on some, but not all, of their loans.
Redesigns are not well known for several reasons. Record interest rates in recent years have made refinancing the preferred approach for borrowers looking to save on monthly payments. Plus, lenders make little to no money on redesign – Chase and Wells Fargo don’t charge anything; Bank of America charges a fee of up to $ 250.
With interest rates now trending up, more and more customers are interested in redesigns, Wells Fargo spokesman Tom Goyda said. The law on tax cuts and employment, enacted in December 2017, will ensure that more than 28 million additional taxpayers will benefit from the standard deduction rather than itemizing the deductions, according to estimates by the Joint Committee on Taxation , a committee of Congress. That means fewer households are using the mortgage interest deduction to lower their tax bill in April, said Laila Pence, president of Pence Wealth Management and Pence Real Estate, based in Newport Beach, Calif.
Borrowers should call or write their lender to ask if their mortgage is eligible for a recast. The homeowner will usually be asked to sign an agreement, but unlike mortgage refinancing, there is no credit check and the paperwork and fees are nominal. It usually only takes a month or two for new payments to take effect.
In some ways, the overhaul is the flip side of the more well-known strategy of making additional principal payments, which reduces the term of the loan while keeping the same monthly payments. But the two maneuvers can coexist: People who make a single lump sum payment or who have made a number of additional payments over the years, such as borrowers who make mortgage payments bi-weekly rather than monthly, can apply later to their lenders to recast the mortgage.
Making additional or excess mortgage payments will shorten the term of the loan, saving the homeowner thousands of dollars in interest. The principal repayment and recast also saves on interest over the life of the loan, but not as much as a simple prepayment because the loan term remains the same.
Lenders have various minimum prepayment amounts, which they call “cuts” for the overhaul: Wells Fargo’s is typically $ 20,000 “but will consider smaller amounts on a case-by-case basis,” Goyda said. . Bank of America requires a prepayment of $ 1,000 to $ 6,000, depending on the loan. Chase has no minimum.
Ms Pence, the wealth manager, usually tries to dissuade clients with low mortgage rates from any kind of prepayment because “there are so many alternatives as to what to do with this money,” she said. . But customers who are highly risk averse and tempted to just hang on to cash may benefit from an overhaul that gives them immediate savings, especially if they take advantage of the standard deduction. she declared.
Some things to consider about mortgage redesigns:
• Deduction decisions. As part of the 2017 tax reform, the maximum amount of mortgage interest that can be deducted was reduced from principal interest by up to $ 1 million to $ 750,000. But the law vested in the $ 1 million limit for pre-reform loans, according to Nicole Kaeding, director of federal projects at the Tax Foundation, a Washington-based think tank. Homeowners who are currently writing off mortgage interest on loans over $ 750,000 should carefully run the numbers before forgoing a deduction that is no longer available, Pence advised.
• Availability varies. Banks process redesign requests on a case-by-case basis, and not all loans are eligible due to restrictions imposed by various programs or investors. Quicken Loans offers redesigns for many compliant loans. Most of the jumbo loans it issues, starting at $ 484,851 in most parts of the country and going up to $ 726,525 in high-priced areas, are managed by service providers, who can be able to suggest an overhaul.
• Alternative investments. Mortgage holders who currently have low fixed rate loans should carefully consider whether other prudent investments, such as high quality bonds, could result in higher returns that would exceed the savings on monthly payments.
To see if the redesign is right for you, try a online calculator. Users enter their mortgage balance, current payment, and the amount of additional equity they want to add. The calculator determines the new monthly payment. The calculator then compares the number of months or years that would be saved over the life of the mortgage if the prepayment were made without a recast.
For example, 15 years after starting a $ 1 million mortgage at about 4%, a $ 100,000 prepayment will reduce the monthly bill by about $ 750 per month. Alternatively, the same additional equity added without recast would reduce the life of a loan by about three years.
Write to Katy McLaughlin at email@example.com
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