During the global pandemic, it was estimated that over 1 million US homeowners were at least six months behind on mortgage payments. When reevaluating your finances in the post-pandemic world, one factor that can help everyone is lower monthly payments.
But how do you manage to achieve them?
There are two options available, both with strengths and weaknesses. Read on as we discuss the difference between a reamortize and refinance of your mortgage.
What Is Reamortizing a Home?
Reamortizing is often known as a loan recast. This is when a lump sum is paid off the mortgage, recasting the terms so that a smaller monthly amount is paid back. Both terms cover the same principle, with no difference in terms and outcomes.
As it does not involve a new loan, it can be good for people who may have credit issues. It can also save on refinancing fees.
This process starts with the amount paid back. This is known as the principle.
The remaining payments are then recalculated based on what needs to be paid after this. New payment schedules are created and are known as the amortization schedule.
Advantages of Reamortization
Both reamortization and refinancing have a number of pros and cons. Below is our guide on what you can expect when rearmortizing a home.
Lower Fees
A recast of your mortgage does not require a traditional loan application. This makes the closing costs much lower than if you would refinance. Around 2% to 3% of the total loan cost can be charged when refinancing.
Easier Process
Giving them money is a much easier process than getting money from a bank. When you opt to reamortize your home, you are giving the bank money to lower your payments. Thus, recasting ends up being a much easier task than the form-laden, lengthy process it takes to get a loan.
Smaller Monthly Payments
Not only do you pay your mortgage off earlier, but you will also have lower monthly payments. This frees up your budget and increases your level of disposable income.
Better for Those With Credit Issues
Refinancing is essentially swapping an existing loan for another. You have to go through the same approval process. When your credit score is low, or you don’t have much equity in the home, then you may get turned down.
With a recast, this is not the case. Therefore, it can be the only option available to some. In addition, the lower monthly payments can allow you to reallocate some of your budgets should you be in financial trouble.
What Is a Refinance?
Refinancing involves switching your existing mortgage for a new one. Your old mortgage will be paid off by the new bank or lender, and your debt on the household switches to them. People do this to get lower interest rates, shorten their mortgage terms, and turn equity from the home into cash.
Refinancing comes in two separate ways. These are rate and term refinance or cash-out refinance.
Rate and term refinance means you will get a loan with a smaller level of interest rate. It can also result in shorter payment terms.
Cash-out refinancing allows you to take money from the amount you have paid back into the mortgage, giving you cash and recalculating your loan. It allows you to gain liquidity from your property, but can mean higher amounts need paying back. In these aspects, view it as a lower rate loan borrowing from the equity in the property.
As an example, imagine your home is worth $200,000, and you have paid $100,000. You could cash out $20,000, and your mortgage owed would now be $120,000.
Advantages of a Refinance
There are a number of advantages when refinancing your home. The most important ones are collected below.
Better Rates
Better rates are the main reason to refinance a mortgage. If your credit rating has improved since you took the mortgage out, you may be eligible for better rates. Rates may have fallen anyway, and other lenders may just be offering better deals.
Switch in Rate Types
When you take out a mortgage, you can choose between fixed and adjustable rates. A refinance allows you to switch to another type. You can decide to finish the remainder with a more flexible fixed-rate or take advantage of low-interest rates with an adjustable one.
Lower Payments
Lower interest rates can mean lower monthly payments. All you need to do is keep the same pay-off date. Extending the data will also help lower the amount you pay back each month.
Liquidity
With cash-out refinancing, you get a lump sum of cash. Use it to add value to your home, or just spend it on yourself. Many people use this to pay for a deposit on their children’s house or fund their education.
Which Is Best for You?
Both methods aim to reduce your monthly payments. When you reamortize your home, the largest decider is that you need a lump sum to pay it off. Thus, you need this capital from somewhere, and if you don’t, then refinance is the only option.
Refinancing allows you to take down your monthly payments, but only if you have a good credit rating. As it is essentially applying for a new loan, it will not work for everyone.
Starting to Reamortize or Refinance
Now that you know the pros and cons of a reamortize and refinance, evaluate your current finances. Should you have money to pay off, then see what you could be saving. Speak to an expert to give advice.
Your first stop for financial help should be the Mortgage News Channel. We have everything from first-time buyer information to loan options.Click hereto see all our resources on managing your home.
At 7th Level Mortgage, we are an experienced team of mortgage professionals based out of New Jersey and serving the east coast from Pennsylvania to Florida, including Delaware and Maryland. We have won numerous awards for our excellent professional work and reputation with clients for being extremely diligent, accessible, and hands-on throughout the entire mortgage process.