'Secret' Way to Lower Mortgage Payments

Reprinted from REALTOR® Magazine, January 5, 2011 with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2011. All rights reserved. 

Home owners can trim their monthly mortgage payments by “recasting” or “re-amortizing” their loan, without having to refinance and face hefty closing cost fees, experts say.


When recasting, the borrower pays off a lump sum of the loan’s principal and then resets monthly payments at the loan’s original interest rate and terms.


Here’s one scenario: $230,449 is left on a 30-year fixed rate loan for a $300,000 mortgage taken out at 7.93 percent in 1995. The borrower pays $20,000 toward the principal and asks the lender to reamortize their payments over the remaining 15 years of the loan. The monthly payment then drops by $52, from $2,187 to $2,135 per month. ($100,000 toward the lump sum would save $730 a month.)


Since borrowers are not asking for a new loan, they will not have to pay closing costs or submit to another credit check. (Note: “Recasting” is often used in the mortgage industry to refer to interest rate resets on adjustable-rate mortgages. In this case, the interest rate and loan term remain the same. )


“People don’t really know about it, but it’s become more common recently,” Alan Rosenbaum, founder and chief executive of the Guardhill Financial Corporation in New York, said about recasting.


Borrowers who just make extra payments toward the loan’s principal but do not ask the bank to recast the loan will keep monthly payments the same and just shorten the overall time it takes to pay off the loan. Recasting, on the other hand, reduces the principal but then, in turn, lowers monthly payments and interest over the life of the loan.


Some recent buyers may find recasting a good option, particularly when it makes little financial sense to refinance so soon after purchasing a home but are expecting a large sum of money. For example, buyers who expect to receive a tax refund or other substantial money after closing on their property, such as proceeds from the sale of another property or stocks, may want to look into recasting to lower monthly payments, says Edward Ades, the owner of Universal Mortgage in Brooklyn, N.Y.


Source: “A Little-Known Strategy for Cutting Mortgage Payments,” New York Times (Dec. 30, 2010)