Great news! You’ve found your dream home, but you want to be able to use the equity from your current house to put a sizeable down payment on your new dream home. Or, perhaps you’re worried about not finding a new home before closing on your current home. The good news is you may not have to wait.
A little-known option that might allow a qualified home buyer to purchase a new home before selling their current home is something called Mortgage Recasting (also called loan recasting).
A mortgage recast is when a homeowner is authorized for a loan without the contingency of having to sell their current home. The homeowner can close on their future home and, once their current home is sold, then recast their loan using the equity earned from the home sale.
The way recasting works is a large lump payment is paid toward the principal of the loan (usually at least $5,000 to $10,000). Next, your lender will calculate a new principal and interest payment based on the lower principal balance, in turn lowering the monthly note. The interest rate and loan terms remain unchanged.
New home purchase: $300,000
Loan amount: $291,000 (after down payment and financed PMI buyout)
Interest rate: 4.75%, 30-year fixed
Monthly payment: $1,517.99
Fast forward a few months to the sale of the previous property:
Net proceeds: $100,000
Mortgage recast requested applying the $100,000 to the loan
New loan amount: $191,000
New monthly payment: $996.35 (over $500 less)
Please be aware that not all lenders allow recasting, and there are fees involved to do so, but they are typically only a few hundred dollars. Also, not all loans qualify for recasting. Check with your lender for all rules and requirements to see if this is the right option for your home sale.
Be sure to keep in mind two mortgages and carrying costs would have to be paid until the second home is sold. Make certain these costs would not be a financial strain before making this decision.
Our team is happy to put you in touch with some fantastic local lenders to discuss this option.