What is mortgage overhaul and why should you do it?

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A mortgage overhaul can help you lower your monthly payment without changing your loan term or interest rate. Find out how it works. (Shutterstock)

Receiving a financial boon might inspire thoughts of all the fun things you could do with the extra money. However, a wise use of money could include an additional payment towards the principal of your home loan. This is called a mortgage overhaul. After you make the additional payment, your lender will re-amortize (recalculate) your mortgage based on the new lower principal balance.

Although the lump sum payment does not affect the term or interest rate of your current mortgage, it may help you pay off the loan balance more quickly. Or, if your loan servicer offers a mortgage overhaul, it could allow you to lower your monthly loan payment.

Credible allows you compare mortgage refinance rates from various lenders in minutes.

What is a mortgage overhaul?

Mortgage recasting occurs when your loan officer recalculates your monthly mortgage payment after you’ve made a large payment on the principal of your existing home loan. Before making your payment, you must specifically request and obtain permission to repost. Otherwise, your monthly payments will not decrease, even if your large payment will still reduce your principal.

The redesign should lead to a lower monthly payment and reduce the amount of interest you pay over the long term. The process is simpler and less expensive than refinancing, and your loan servicer won’t need to review your income, credit score, or debt-to-equity ratio.

However, not all loan servicers offer mortgage overhauls. Those who do will create a new amortization schedule after applying your large payment to your outstanding home loan balance. Your new monthly payment will be based on the lower loan balance. Your interest rate and repayment date will not change.

Before recasting your mortgage:

  • Check with your mortgage agent to see if they offer an overhaul. Not all repairers do this and few advertise it.
  • Ask if your type of loan can be recast. Not all types of loans are eligible. For example, government loans, such as FHA loans or VA loans, cannot be recast.
  • Decide how much money to put towards your principal. Minimums may apply and are generally $5,000 or more.
  • Find out if your manager charges a mortgage overhaul fee. Some repairers do not charge a fee for a mortgage overhaul, while others do.
  • Continue to repay your loans. If you don’t, you could incur late payment fees and a negative mark on your credit report. You could also become ineligible for a redesign.

Your loan officer should respond as follows:

  • Let you know if he offers a mortgage overhaul.
  • Check your loan type for eligibility.
  • Inform you of the minimum lump sum he will accept.
  • Inform you of any mortgage overhaul costs.
  • Notify you when the redesign process is complete.

WHAT IS CASH-OUT REFINANCING AND HOW DOES IT WORK?

How mortgage overhaul works

Mortgage overhaul is a relatively simple concept to understand. Here is an example of how it works:

Let’s say 15 years ago you borrowed $200,000 on a 30-year mortgage with a fixed interest rate of 4%. Now you have a remaining principal balance of approximately $129,000 and 15 years remaining on the term of your loan. Your monthly payment is approximately $955.

With a lump sum payment of $10,000, your principal drops to $110,000. Recasting this amount over 15 years would reduce your monthly payments to around $880.

The payment difference of about $75 per month for 15 years (180 months) totals $13,500. By subtracting the initial lump sum payment of $10,000, you will save $3,500 in interest over the life of the loan by recasting.

How long does the overhaul of a mortgage take?

If you are considering a mortgage overhaul, be aware that the process can take several weeks. It is important to continue making your regular payment each month during this time. If you are not current on your loan payments, you could become ineligible for the mortgage overhaul.

How many times can you recast a mortgage?

Some loan servicers allow you to recast a mortgage as many times as you want, but others limit the frequency. You may also have to pay a redesign fee each time.

HOW OFTEN CAN YOU REFINANCE YOUR HOME?

Should we recast or refinance?

Consider these differences when deciding if refinancing or redesigning might be right for you:

  • Mortgage overhaul might be a better choice if you want to keep the same interest rate and loan term as your current mortgage and have extra money to invest in your home in exchange for a lower monthly payment. It also costs much less than a mortgage refinance.
  • Mortgage refinancing can be the right option when you want to replace your existing loan with a new one. This could allow you to get a lower interest rate and change the term of your loan. You could even do a cash refinance to reduce the principal of your loan. But you will have to pay closing costs, which can be 2-5% of the loan amount.

Compare mortgage refinance rates on Credible and see if you qualify for a mortgage refinance right now.

Redesign vs loan modification

A loan modification is another alternative to a mortgage overhaul and can be beneficial in certain circumstances:

  • Mortgage overhaul allows you to make a large payment on your loan principal, resulting in lower monthly payments. The interest rate and term of the loan do not change. If you’re considering a redesign, you’re probably in good financial shape.
  • Loan modification can help you if you are behind on your mortgage payments or in danger of foreclosure. Your loan officer can extend the term of your loan, reduce the interest rate, or defer principal until you sell, refinance, or reach the end of your loan term to help you stay in your home if you have experienced serious financial difficulties and are not eligible for refinancing.

Eligibility for a mortgage overhaul

Not all loan servicers will recast a mortgage, but if yours does, here’s what it may take to qualify:

  • A classic loan — You may not be able to recast an FHA, USDA, or VA loan.
  • An eligible lump sum payment — Check with your loan manager to make sure your payment meets their criteria. Many require a minimum amount of money for an overhaul.
  • An existing home loan in good standing — If you have recently made late payments, you may not qualify.
  • A minimum of two consecutive one-time payments at your current payment rate — Your loan servicer may not allow you to recast a loan you have just entered into.

15 OF THE BEST MORTGAGE REFINANCING COMPANIES

Benefits of overhauling your mortgage

If you are recasting your mortgage, here are some of the benefits:

  • Lower monthly mortgage payments — Overhauling your mortgage should result in a smaller loan balance with lower monthly payments.
  • Interest savings — A smaller loan balance means less interest to pay on your loan.
  • Same loan term — Recasting a mortgage does not extend the term of your loan. And you can still pay off your mortgage sooner if you want.
  • Minimal fees — The fees you’ll pay to recast a mortgage are usually much lower than if you were to refinance – perhaps a few hundred dollars, depending on the loan officer.
  • No credit check or review needed — Without a credit check or appraisal, it’s often easier to recast a mortgage than to refinance one, especially if your home’s value has gone down or your credit score has gone down.

Disadvantages of overhauling your mortgage

Of course, the redesign of a mortgage can also have disadvantages:

  • Money tied up in your home – Using a windfall to reduce your mortgage principal means you won’t have that money available for other needs. If you need money for an emergency, you will have less available.
  • Interest rate unchanged — You may be able to save more money by refinancing your mortgage rather than recasting it.
  • Same loan term — Making a lump sum payment without recasting, or simply making an extra payment each month, could help you pay off the loan faster.
  • Small reduction in payments — A large lump sum may only slightly reduce your monthly payments.
  • Delay of treatment – It can take several weeks to complete a mortgage overhaul. During this time, you must continue to make your regular payments to keep your mortgage in good standing.

Is a mortgage overhaul right for you?

Under the right circumstances, overhauling your mortgage might make sense. If you have extra funds and the interest rate on your current mortgage is low, it might be worth restructuring your mortgage to get a lower monthly payment and avoid refinancing fees.

Another situation where a remodel might make sense is if you bought a new house with a mortgage before selling your old house. Once your old home has sold, you may want to use the funds to pay off your new mortgage and recalculate your monthly payments, if your loan servicer allows it.

Still, there are times when other options might be more advantageous, such as refinancing your mortgage when interest rates drop.

WHEN IS THE RIGHT TIME TO REFINANCE MY MORTGAGE?

Although Credible cannot help you recast your mortgage, you can compare prequalified rates on a refinance loan from several lenders. This information could help you decide if overhauling, refinancing, or staying the course with your existing mortgage is the right decision for you.