There’s an easier and lesser-known option than refinancing for homeowners who want to lower their monthly mortgage payment. It’s cheaper, too.
Instead of paying a few thousand dollars in refi costs, they can “recast” their existing loan for a few hundred dollars and still have a lower monthly payment, and their loan balance will be lower, too.
Recasting, also called “re-amortizing” a home loan, is when a large payment of $5,000 or more is applied to the unpaid principal balance of the loan, and the loan is re-amortized and the monthly payment is lowered. The interest rate and loan term remain the same. Only the monthly payment is lowered because the principal has been reduced.
Recasts are typically done when someone comes into a large amount of money, such as an inheritance, pay bonus at work, or win the lottery. Borrowers must be current on their loan payments to qualify for a loan recast.
Recast helps owner keep a home
Thomas Nitzsche, a spokesman for ClearPoint Credit Counseling Services, lowered his mortgage payment by $70 a month by recasting the loan on a rental home he owns. It’s not a lot of money, but with the rental barely making money, the $10,000 recast allowed him to be able to afford and keep the home.
“It gives me a little more wiggle room in the budget sheet,” Nitzsche says.
For homeowners with $10,000 or so to put toward their mortgage, it could make more sense to put the money toward the principal and not lower their monthly payments so they can pay off the loan faster. Or they may need the money to pay off debts such as student loans, contribute to their retirement or emergency funds, or want to invest it elsewhere.
Nitzsche did a recast for a different reason. He doesn’t plan on selling the home in a few years and doesn’t want to pay off the loan balance. He was just looking for a more affordable loan without the expense of refinancing.
He got a $10,000 HAMP, or Home Affordable Modification Program, incentive to help him afford to keep the home after he was laid off from a previous job. All of the money had to be put toward the principal, and could be done by recasting the loan.
Other reasons to recast
Recasts can be as low as $250 through a lender, though banks rarely advertise it and customers may have to ask if it’s offered. Fixed-rate loans are more likely to be recast than adjustable-rate loans. Recasts are usually allowed on conventional and conforming Fannie Mae and Freddie Mac loans, though not FHA and VA loans.
Besides recasting so that the monthly payment is lower, homeowners may want to recast if they’re buying a new home but can’t yet sell their old home and are paying two mortgages for awhile. When their old home sells, they can take the profit to recast their new loan.
A recast can’t be done within the first 90 days of a loan, but it can be done afterwards to reduce the principal and payments on the new loan.
A loan recast doesn’t require an appraisal. A loan refinance, however, can be difficult if a home’s value drops, since many lenders require 5-10 percent equity. Loan recasts also don’t require credit checks.
Although a recast doesn’t shorten a loan term, it does help cash flow by lowering mortgage payments. But if you come into a large sum of money and want to pay off your loan faster, switching to biweekly mortgage payments may make more financial sense than a recast.