When circumstances make it tough for you to make your mortgage payments, consider asking your lender about a mortgage recast.

American philosopher John Dewey once said, "A problem well stated is a problem half solved." If your problem is a mortgage loan that's annihilating your monthly budget, contact your lender and ask if there's a way to reduce your payments. The solution might be a mortgage recast.

Alternative to refinancing

Contrary to popular belief, a mortgage refinancing is not the only way to fix a mortgage that no longer suits you. An alternative is a mortgage recast, which is a recalculation of your payment based on a reduced principal balance. There are two situations where a recast will lower the payment:

  • You make a large principal payment; or
  • The balance is less than what you originally borrowed, and the term is reset to its original length.

In most cases, the payments are recalculated with the same interest rate and a new maturity date. Let's say, for example, that you borrowed $250,000 six years ago under these arrangements:

  • 30-year term
  • Fixed rate of 6 percent
  • Monthly payment amount of about $1,500
  • Maturity in 2032

After six years of making payments, your current loan balance would be about $228,495. Continuing this hypothetical scenario, let's assume that you've run into a spell of bad luck, and are worried about missing payments. You contact your lender, and it agrees to a recast using the same interest rate and maturity term. The recast mortgage would look like this:

  • 30-year term
  • Fixed rate of 6 percent
  • Monthly payment amount of about $1,370
  • Maturity in 2038

The payment is reduced because you're now financing only $228,495 for 30 years, rather than the original $250,000. Keep in mind that recasting in this manner will substantially increase your total interest expense, because the debt will be outstanding for an additional six years.

A mortgage recast will lower your payments by a greater amount if you have paid off a larger portion of the original balance. The opposite is true as well: if you just funded your mortgage a year ago, a recast won't help you much.

Advantages over a refinance

The recast has some convenient advantages over a mortgage refinance. You'll work with your existing lender, and there'll be no closing costs. While the lender may charge you a fee, it shouldn't be substantial. In reality, the hardest part of the process will be getting your lender to agree to the recast; thereafter, processing the change should be relatively simple.

A problem mortgage is a very big problem indeed. If you're in dire straits, reach out to your lender and explain your situation-even if you're not sure a recast will help. The sooner you open the lines of communication, the easier it will be to work things out.

    Published on May 15, 2008