If those monthly mortgage payments have you down, consider recasting your home mortgage to reduce your loan balance -- and your monthly payments. You may not have heard of recasting, as refinancing is more common and more publicized. However, if your lender offers a recast -- and you have some extra cash -- recasting is a simpler and less expensive process than refinancing.
A loan recast is essentially a two-part process: The customer agrees to pay additional money to reduce the principal balance, while the lender agrees to re-amortize the loan at its original term. For example, if you have an original loan of $200,000 at a fixed rate for 30 years, you pay a specified amount each month for the entire term of the loan. If you decide to recast after making your fixed payment for three years, you would make a lump sum payment of at least $5,000. The lender applies this payment to the principal and extends the loan back to 30 years, but your monthly payments are then reduced because you owe $5,000 less on your principal.
Recasting a mortgage loan makes the most sense when your primary objective is to reduce your monthly mortgage payments. This is common for people that have tight budgets resulting from other debt obligations and expenses. A recast also makes sense when interest rates are the same or higher than your loan rate. Furthermore, when you refinance, you typically have to pay closing costs, which can really add up, but according to Bankrate.com, recasts cost as little as $250 in some cases.
Recasts aren't for everyone. If interest rates have dropped significantly since you obtained your mortgage, you might do better with a refinance. Recasts offer no interest rate advantages. By reducing your loan rate on a 30-year fixed loan, you could potentially save tens or hundreds of thousands in interest over time. Also, with a recast, you need a lump sum to pay down the principal. This is what allows the lender to reduce your monthly payments going forward. You might be better served to invest your money in higher-yielding investments and continue to pay your current monthly amount.
Loan recasts are rare and not typically promoted by lenders since they provide the lender with minimal additional income and no direct benefits. Many lenders only do recasts with fixed-rate loans, according to Bank of America, which means that if you have a variable-rate loan, you might be out of luck. Further, government loans, like FHA and VA loans, aren't eligible for recasting.
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