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Homestead Financial Mortgage

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Looking for a Bridge Loan? You Probably Need a Recast Mortgage.

When a homeowner is looking to sell their current home and purchase a new home, we often get questions about a bridge loan. After speaking with the buyer, we realize the better product for them is a conventional loan with a “Recast.” Let’s first look at what a bridge loan is, and then we’ll explain a recast.

 What is a Bridge Loan?

Here’s a simple bridge loan definition: it’s a temporary loan that uses the home equity of your current home to make a down payment on a new home.

What is Mortgage Recast?

A mortgage recast is when a borrower makes a large, lump-sum payment on the principal of their existing mortgage after closing.  The servicer re-amortizes the monthly payment based on the new principal balance and cancels the mortgage insurance (if applicable).

Why Is Recasting a Better Option Than a Bridge Loan?

Here’s the short answer – because you save money. Here’s why:

  • A bridge loan is an additional mortgage with another set of closing costs and transaction fees. Plus, a bridge loan comes with high interest and are adjustable vs. standard fixed-rate mortgages.
  • With a mortgage recast, the buyer will take out a new mortgage for the home they’re purchasing and come up with the standard 5% down payment. So, they’ll need to be able to afford two payments (current home and the new home) until their existing home sells.

How Does a Bridge Loan Work?

Step 1: Paul and Ellen have a home at 123 1st Street. They owe $100,000 and will sell it for $200,000. They will buy a new home at 456 2nd Street for $300,000. They will put 5% down ($15,000) and finance $285,000.

Step 2: Once they move into their new home on 456 2nd Street, Paul and Ellen are now ready to put 123 on the market.  They sell their old home for $200,000 and pay off the $100,000 mortgage. They still have $100,000 left from the sale. Let’s see how to recast their mortgage.

Step 3: Paul and Ellen take the $100,000 from their sale and pay down  (recast) their mortgage on their new home at 456 2nd Street. Servicing now changes the payment based on the new principal balance for the remaining term. Plus, with over 20% equity, there’s no mortgage insurance.

A Mortgage Recast is a Smart Move

As with any real estate transaction, there are mortgage recast pros and cons, but there are many more advantages than disadvantages. And whenever possible, we help borrowers choose to recast, over, taking out a bridge loan. As long as you have enough means to afford two payments for a stretch, it’s worth it. Plus, there’s considerable value to the convenience of buying your new home first–before listing your old home. It takes a lot of stress out of the entire process.  If you’d like to see if recasting your mortgage is a possibility for you, contact us today.

Summary

Recasting is right for you if…

You can afford:

  • Two house payments for a while &
  • Have 5% down payment for the new home

You value the convenience of:

  • Finding a new home and moving in
  • Before selling your old home

To learn more, please reach out!