Making equity work for you in the seller’s market
Meet Joe and Jane, a couple who are expecting their first child and find themselves in need of a larger home. After exploring options, they have discovered it is unlikely that a seller will accept a contingent offer. (In this case, a contingent offer means they will purchase the new home if, and/or when, their current home sells.)
Luckily for Joe and Jane, they have enough cash to cover the down payment on the new property and are also able to qualify for a new mortgage prior to selling their current home. However, Joe and Jane would have preferred to have invested some of the equity in their current home, which would have increased the down payment on their new home and resulted in a lower monthly mortgage payment.
This is a common scenario that Alpine Bank mortgage lenders see across Colorado. Since it’s still a seller’s market — with some visible trends toward a more balanced market — homebuyers are often stuck choosing between a smaller down payment and larger loan, or, a bridge loan to tap the equity on their current home.
Both of these options can be expensive, as the smaller down payment results in a larger monthly payment on the new loan and the bridge loan has additional closing costs associated with it. Is there another option here that would be a better fit for Joe and Jane?
Yes. It’s called a recast. It’s when a borrower takes a sum of money and applies it toward their mortgage after the mortgage has originated. The lender then accepts the payment, lowers the loan balance, and adjusts the payment to reflect the new loan balance. This may be clearer when illustrated with an example, so let’s walk through Joe and Jane’s situation.
Joe and Jane’s new property details, before recast:
- Cost of the new property = $750,000
- New loan amount = $675,000
- Principal and interest payment on new loan = $4,491/month
Let’s say that Joe and Jane sell their previous home very quickly and have $200,000 to apply to their recast, before having made enough payments on their new loan to reduce the loan balance by much. Here’s what the results of the recast would look like:
Joe and Jane’s new property details, after recast:
- Recast loan amount = $475,000
- Recast principal and interest payment estimate = $3,160/month
- Savings per month estimate = $1,331
In this example, Joe and Jane were able to lower their monthly payment after closing, simply by asking their mortgage servicer to recast their loan. They didn’t have to refinance and accept a new interest rate; they didn’t have to pay closing costs again and they wouldn’t have had the potential downside of starting their amortization period over again.
Recasts are available on many different types of loans and often are provided at little to no expense to the borrower. Your local Alpine Bank mortgage lender can help you explore the possibility of a recast mortgage for your next home purchase.