The Little-Known Secret of a Mortgage Recast, And How to Use it To Time The Real Estate Market

While over the long haul, home values will always go up due to inflationary pressure on the value of a dollar, we understand that there are times each year when homes are at a premium due to demand.  Yes, there are cycles (usually around 16 years for a complete cycle) of up-swing and down-swing on home values, but most of us can’t plan our major life events (births, deaths, job-changes, relocation, marriage, divorce, or inheritance, etc.)  around these larger market conditions.  What we can do is capitalize on the seasonal trends throughout the year we find our life demanding a change.

Generally speaking the months around the end of year holidays and the first few months of the new year see less demand for real estate than April through August.  Things like gift buying, travel for a family get-together, tax season, and just wanting to hibernate when its cold & dark outside restrict demand for most folks.  As things get warmer, brighter, and those with children see a break in the school year as an ideal time to relocate, demand and therefore prices, see a peak.

  • Buy NOW, Sell Later: If you are thinking of moving this year; and have savings to buy before you sell, you may be able to take advantage of the turning seasonal differences involving supply and demand.  You may implement a plan with your Realtor that will take advantage of buying at the tail end of when there is less demand, and selling when demand starts approaching its seasonal peak.  Depending on your current monthly payment, the average time in your neighborhood to sell, and seasonal swings anticipated in your price ranges this could save you a lot of money.
  • RECAST, don’t Refinance: There is a little known, little advertised feature of many loans backed by Fannie-Mae or Freddie Mac (Not available on FHA or VA loans)  called a “Mortgage Recast”.  What this enables you to do, is generally spend a few hundred dollars in fees to your mortgage servicing company to apply a lump sum of equity from your current home’s sale to your newly purchased home, without needing to spend thousands of dollars of fees on a more common and expensive refinance.
  • How a mortgage recast works (a hypothetical example): Your rate and term (say 30, or 15 year amortization) stay the same as they were (as will the date of your last payment) but your monthly payment will lower significantly when your amount financed is reduced by the equity you take away from your sale and apply to your purchase after the fact. For example you buy a home in February of 2020 on a 30 year conventional fixed loan (paying off in February of 2050) at 3.75%.  Your New Home costs $450,000.00 and has all the bedrooms you’ll ever need.  You put down 10% – $45,000 and have a mortgage of $405,000.00, mortgage insurance of around $101.25 until your home sells and you recast.    Your Principal, Interest, and Mortgage insurance on this loan each month = $1976.87 (you’ll have property taxes, insurance, and likely HOA dues as well, but we’re not calculating those as they are property specific and unchanged by this strategy.

You consult with your Realtor about what price your home should sell for and how long it should take.  Your current home (without enough bedrooms) should sell for $375,000.00 and sell within two months.  You currently owe $275,000.00 on it. Your Realtor creates you a Net Sheet showing your proceeds from the sale of your current home should be $72,082.00 after paying escrow, title, real estate transfer taxes, and commissions.  That $72,082.00 in profit you don’t need to pay capital gains tax on because you’ve lived there at least 2 of the last 5 years.

You take that $72,082.00, apply it to a recast of your new home’s loan, and now your loan balance went from $405,000.00 to $332,918.  Your rate stays at 3.75%, your mortgage insurance goes away because you’re now over 20% equity, and your monthly payment is calculated based on the new lower loan balance that will still pay off in February of 2050.  Running the numbers, your payment went from $1976.87 to $1541.80/month and you have a beautiful new home with all the space you’ll need. That’s a savings of $435.07 per month and it only cost you a few hundred dollars for the recast, NOT Thousands for a refinance!

You did all of this before your new $450,000.00 home went up to $461,250.00 in the peak buying season ($11,250 saved, or earned in equity).  You enabled yourself to buy with less competition and stress than trying to out-bid other buyers for your ideal home.  You were able to sell your home during the peak buying season and sold it quicker, for more money than had you sold 1st and bought second.  You took advantage of the seasonal swings in demand to make both your purchase and sale of real estate easier, and more profitable for you.  Well done.  If you have any questions, feel free to comment below & we’ll be happy to help!  As a reminder, I’m a Realtor, not a mortgage, or tax professional.  Please consult with appropriate professionals for needs specific to those areas!

 

 

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