Money Matters
presented by: Vision Financial
It used to be that conventional and FHA/VA mortgage loans allowed for a partial pre-payment of principal, without a penalty, which shortened the remaining term of a loan but did not reduce the amount of the monthly Principal and Interest(P&I) payment. New rules have gone in to affect this year which allow a borrower to pay down the principal and reduce the amount of the P&I payment. This is known as a pay down and re-cast of the loan. Previously, this could only be accomplished by a complete refinance of the existing loan and the associated closing costs.
An example: A $200,000.00 mortgage loan at 5% interest rate for 30 years would have a P&I payment of $1,073.64 per month. Say after 3 years one was able to pay $50,000.00 on the balance. Previously this was possible (with no penalty) but it didn’t lower the scheduled payment. It did, however, shorten the term of the loan down to just under 16 years. Now it could lower the P&I payment to around $755.24 and while it does not shorten the term, it does increase cash flow by $318.40 per month.
Some rules do apply. Re-cast is not available from all lenders. It is not available on FHA/VA loans. There is a minimum amount, usually $5,000 and there is a fee charged by the lender, typically $250-$500.
Is this a good idea? Like most financial decisions, it depends on your individual situation. Points to consider:
- Cash paid down on your mortgage loan becomes very illiquid, i.e. locked in to the equity of your home and only released at time of sale or refinance.
- If current interest rates are lower then your current rate, it might make sense to refinance and inject the cash to pay down the balance to be refinanced. Forget about the outdated “2% rule”. If your current rate is lower or close to available market rates, the paydown and re-cast could make more sense.
- Consider your expected tenure in the house. The longer it is, the more sense it could make to paydown and re-cast. It also might make sense to simply pay the principal down, thus keeping the P&I payment the same and pay the house off sooner.
- This option can eliminate the need (and expense) of a bridge loan when buying one house before selling an existing house.
This is a wonderful option that many lenders are now making available and allows the lowering of a P&I payment without incurring the expense of a refinance.
Our homes are one of our largest assets and decisions about the principal paydown re-cast option should involve input from a mortgage professional, your financial advisor or both.
-Larry Anderson
Vision Financial Group
4505 Pine Tree Circle, Birmingham, AL 35243
205-970-4909, www.vision-financialgroup.com
Advisory services offered through Investment Advisors, a Registered Investment Advisor and a division of ProEquities, Inc. Securities are offered through ProEquities, Inc., a Registered Broker Dealer and Member FINRA & SIPC. Vision Financial Group is Independent of ProEquities, Inc. Securities and insurance products offered are not bank deposits, have no guarantee, are not FDIC insured and may lose value.
