Let Me Clarify

2024 marks another year of high interest rates for new home buyers coupled with historically high home prices. In addition, the cost to maintain a home has risen and county assessments on home values are increasing taxes. This is a lot for homeowners to handle, especially those who rely on fixed-income sources to maintain their lifestyle.

There are two primary options available to homeowners that can lower a monthly mortgage payment but they both differ drastically on how they operate.

The first option many homeowners use is refinancing their home. The strategy behind a refinance is using the equity built in the home to finance a lower amount than what was originally financed. Assuming the same loan term is chosen, typically a 30-year or 15-year loan, a lower amount is financed over the same amount of time. If a homeowner’s original mortgage amount was $250,000 and has been paid down to $200,000, the homeowner could refinance the $200,000 over the same loan term and lower their monthly payment.

Although this is a traditional way to lower a mortgage payment, there are drawbacks to refinancing. The first is cost. Working with a lender to create a new mortgage can be costly depending on the value and location of the home. Freddie Mac states the average refinance cost is $5,000. However, many independent researchers state that it costs between 2% and 6% of the mortgage balance. That would be $4,000-$10,000 on a $200,000 mortgage. The second drawback could come from a rise in interest rates. If rates have risen significantly since the date of the original mortgage, refinancing at a higher rate would result in paying more in mortgage interest. The last drawback is resetting the terms of the loan. Regardless of the mortgage option chosen, the borrower pays more interest during the beginning of the loan than during the later years of the loan. By refinancing the loan, and resetting the terms, the payment could be lower, but more of that payment may be going toward interest than principal.

The second option available to homeowners is to recast their monthly payment. A mortgage recast is also known as a re-amortization. The idea is using available cash to pay down the principal balance on the mortgage then calculating the lower balance in the amortization schedule to lower the payment. A recast simply lowers your monthly payment because you owe less on the home.

The cost to recast is low. Most mortgage lenders will recast a loan for $150-$500. This is a huge advantage of a mortgage recast. However, the upfront payment may be too much for a homeowner. Many lenders require the payment to recast at least $5,000-$10,000. The terms of the loan stay the same. In a mortgage refinance, the loan terms are reset with a new rate. In a mortgage recast, the rate and terms stay the same. In fact, the mortgage can be paid off early. Recasting is a cost-effective way to lower a mortgage payment but that assumes the homeowner has disposable cash to pay down the principal.

Financial situations vary from homeowner to homeowner, but the current market can make owning a home more difficult than in years past. Those who purchased a home before 2022 were able to lock in lower rates than those who decided to purchase after. Still, those homeowners are subject to the increase in maintenance costs, insurance costs, and county assessments affecting all homeowners. Carefully weigh the costs and advantages of either the mortgage recast or refinance before looking to lower a mortgage payment.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.