With mortgage rates rising and the refinancing rush all but over, you may be kicking yourself for losing out on a sure-fire method of lowering your monthly mortgage payments.
What you may not know, however, is that there's another way to reduce your home loan payments: simply by reducing the principal amount on the mortgage itself. Called reamortizing, or recasting, this method isn't for everyone. If you qualify, though, you may be able to knock an appreciable amount off of your monthly payment -- all while avoiding hefty refinancing fees.
Recasting takes on new meaning since the financial crisis
Re-amortizing a mortgage isn't new, but neither is the process given the same kind of press bestowed upon loan refinancing. Often, customers need to ask a bank's loan officer for details, since the method is seldom described to the same degree on an institution's website as are refinancing options -- if it is covered at all.
Since the mortgage meltdown and ensuing financial crisis, recasting has been presented as a way for underwater homeowners to reduce a loan principal bloated by pre-crisis real estate prices. Through its "Keep Your Home California" program, for example, principal reduction has been used extensively to help approved homeowners in the state stay in their homes.
Not for troubled loans only
But reamortization isn't only for borrowers in trouble. The technique can be useful for those who have the wherewithal to pay down a sizable chunk of their mortgage, but don't wish to change any of the terms of the loan.
For example, let's say you came into an inheritance, and determined that paying off a portion of your mortgage principal was the best use for the funds. Using this calculator from Bankrate.com, you can see that the monthly savings can be notable on a 30-year, $325,000 loan at 7% interest by reducing the loan principal amount to $300,000 -- decreasing payments by nearly $170 per month. A higher interest rate, combined with a larger lump sum, would yield even greater savings.
With mortgage recasting, the interest rate and terms remain the same. The savings per month are determined solely by the amount of money you choose to apply toward the principal mortgage amount. Perhaps because of the simplicity of the transaction, recasting is often much cheaper than a full refinancing, which can run into the thousands of dollars.
Using a refinance calculator on myFICO.com shows refinance costs totaling nearly $5,000 on a typical loan, although a "streamlined" refinance could conceivably lower these costs. A principal reduction at PNC, on the other hand, costs somewhere between $500 and $1,000.
Loan recasting isn't the answer for everyone. You will have to qualify for such a modification, just as you would for any loan. In many cases, permissions must be obtained from the original lender or investors who bought the loan as part of an investment security, and most banks require a minimum lump-sum payment to launch the process -- PNC, for example, demands a sum of at least $10,000. You must also do your due diligence to be certain that chunk of change wouldn't yield better results as a direct investment elsewhere.
There are other ways, such as bi-monthly or bi-weekly mortgage payment plans, that will pay down your loan faster, if that is your true goal. For those looking to reduce their monthly loan payment without refinancing, however, recasting might be just the right fit.