Homeowners looking to lower their monthly mortgage payments and save some on interest may be able to do so without all the hefty fees and daunting credit requirements of refinancing.
A little-known strategy, called œrecasting, or œre-amortization, is available through some mortgage lenders and servicers. This involves paying off a lump sum of the principal amount and asking to have the monthly payments reset according to the original interest rate and loan terms. The lump sum reduces the principal, so your new monthly payments decrease slightly and you save on interest paid over the life of the loan.
Lenders typically charge an administrative fee of $150 or more for this service, though borrowers are not required to pay closing costs or submit to another credit check, because they are not asking for a new loan.
Recasting works well for those unable to qualify for refinancing amid the ever-toughening credit guidelines ” perhaps because they are self-employed or have less-than-stellar credit ” as well as for those with extra cash, perhaps a year-end bonus or proceeds from a tax return.
Although the term œrecasting is often used by the mortgage industry to refer to interest-rate resets on adjustable-rate mortgages, here the interest rate and loan term stay the same.
Here™s how it might work. Let™s say that as of late December, you had just over $230,449 of principal left on a 30-year fixed-rate loan for $300,000 taken out at 7.93 percent in 1995. You have been paying just under $2,187 a month in principal and interest. But if you put in $20,000 toward that remaining principal and asked your lender to reamortize your payments over the remaining 15 years on the loan, your monthly payment would drop by $184, to around $2,002. Putting in $100,000 would save $945 a month and bring payments to $1,241.
Making extra payments toward the principal while not asking the bank to recast a loan keeps monthly payments the same and merely shortens the time it takes to pay off the loan.
There are a few caveats to recasting, however. The first is that you may need to have a large sum on hand. JPMorgan Chase, for example, charges a $150 fee and requires a minimum $5,000 payment toward the principal.
Another issue is having a lender, or loan servicer, that offers the service. And even those that do may impose restrictions. JPMorgan Chase and Bank of America exclude loans backed by the Federal Housing Administration and the Department of Veterans Affairs, and loans that were sold off and securitized may also need investor approval.
While few if any lenders advertise recasting, they are trying to become more customer-service-oriented, and they will do it on a case-by-case basis. Interested homeowners should contact their lender™s customer service department for additional information.
Lenders, who would probably rather earn thousands of dollars in closing fees from refinancing your loan, are not obliged to recast mortgages. And certain types of mortgages, for example interest-only and adjustable-rate loans, usually aren™t eligible. The borrower will also need to have been current with all mortgage payments to qualify.
That said, if your interest rate is 5 percent or lower, it may not make sense to recast your loan, as the additional cash could likely be put into an investment with a higher return.