When interest rates fall, the rush to refinance begins. Homeowners flood into their bank branches, clog up the telephone lines and fire up their email accounts, all in an attempt to lower their interest rate and save money on the monthly mortgage.
Refinancing in a low interest rate environment certainly makes sense, but the process can be lengthy and full of fees. There are closing costs to consider, nuisance charges to think about and lots of other impediments in your way. If you are thinking about refinancing your home to get a lower interest rate, resetting your mortgage could be an even better option.
What is a Mortgage Reset?
A mortgage reset, also known as recasting the mortgage or re-amortizing the loan, is a little known strategy for reducing your monthly payments, but one that deserves some additional attention. If you are looking for a way to reduce your monthly payment and take advantage of lower interest rates, recasting the mortgage could be a smart move.
If your lender offers the service, you may be able to recast your current mortgage to save money, all while avoiding the stringent credit requirements, closing costs and high fees associated with the typical refinancing offer. If you qualify for the reset, you will typically be required to make a lump sum payment, with the amount going toward the balance of the mortgage. Once that lump sum payment has been applied, the mortgage is reset with the lower balance, thereby reducing your monthly payments and saving you money going forward.
What Do I Need to Reset My Mortgage?
In most cases, homeowners will need to provide an up-front principle payment to kick off the recasting or resetting process. If you are living paycheck to paycheck and do not have sufficient cash reserves, a mortgage reset may not be the right choice for you.
If, on the other hand, you have cash sitting on the sidelines, putting it toward the balance of your mortgage could be a smart use for the money. Recasting the mortgage in this manner will reduce the amount you owe now and lower your monthly mortgage payments going forward.
How Much Can I Save?
The amount you save on a mortgage reset will depend on a number of factors, including how much you owe on the house, the length of your remaining mortgage and the size of the lump sum you have available. The higher the lump sum payment, the more you can save, but it is important to balance your available cash reserves against the monthly savings you can achieve.
Even if you do not work with a financial advisor, it may be helpful to have a professional review the proposed mortgage reset. Looking at the deal from a holistic perspective and taking all your finances into account is the best way to make a wise decision.
When Does Resetting Not Make Sense?
Recasting your mortgage can make a lot of sense and save you a lot of money, but it is not right for everyone. Before you embark on any type of mortgage adjustment, including traditional refinancing, lowering the interest rate or paying off part of the loan balance, it is important to review your finances, hopefully with the help of a professional.
If you plan to move in the next couple of years, a mortgage recasting will probably not save you a great deal of money. This kind of deal will typically not make sense if you do not have a large lump sum to invest, since this is a requirement. In some cases, a traditional refinancing deal may save you more money, even with closing costs and other fees taken into account.
The roof over your head is one of the biggest investments you will ever make, and the monthly mortgage is likely your largest ongoing expense. If you are thinking about refinancing your mortgage, you might want to check into resetting the loan instead.
