Have you considered “recasting” your mortgage?by Tim Manni
Whether or not you have been able to refinance at today’s record-low mortgage rates, there’s another, less-known strategy out there for reducing your monthly payments: “recasting” or “re-amortizing” your home loan.
Recasting your mortgage allows you to lower your monthly payments by putting up a large sum of money against your mortgage’s principal. Your balance is recasted to a smaller amount and you pay accordingly:
For example, a person with a 30-year $300,000 fixed-rate mortgage and an interest rate of 4.75% who recasted one year into the loan by putting in $60,000 toward the principal would trim his balance to $235,371. Assuming there were 29 years left on the loan, that would result in a monthly payment of $1,247 instead of the original $1,565.
A mortgage recast may be the only strategy available to those of you who don’t qualify for a traditional refinance, but still wish to cut costs.
Of course, the biggest stumbling block to recasting your mortgage is coming up with that large chunk of change in order to make a significant principal payment.
Recasting can be a good choice for borrowers who have cash and want to reduce monthly payments but who can’t refinance, such as those with no-documentation loans, most of whom can’t get the same types of mortgages today due to tighter regulations, even if they have high income and good credit. (Self-employed professionals often find themselves in this boat.) And at a time of low interest rates on certificates of deposit and U.S. Treasury bills, paying off a mortgage early is a relatively safe investment that brings a return at least equivalent to the interest rate on the mortgage itself.
Besides coming up with a substantial principal payment, the qualification process can also be somewhat difficult, especially if your loan was packaged and sold to an investor:
The loan must be in good standing, and you need to secure permission from the loan servicer, who may or may not be the original lender. If the loan has been sold to an investor, the servicer also must secure its approval.
Since nearly two-thirds of all outstanding mortgages have been sold to investors via mortgage-backed securities, some homeowners could find this step difficult, especially those with subprime and “jumbo” mortgages. (Jumbos are loans that are too big to receive government backing through Fannie Mae, Freddie Mac or the Federal Housing Administration.) If approved, the borrower will need to sign a modification agreement, a legal document recording the change of contractual terms.
Recasting your mortgage surely isn’t for everyone, but it’s important to consider refinancing alternatives at a time when getting a new loan with a lower rate is so difficult for so many.