If you've found that a refinance isn't for you, there may be another option for lowering your monthly mortgage payments -- if you can pull together some cash.
"Recasting," also called re-amortization, is a little-known way to shrink your monthly house payment. Recasting involves paying a lump sum toward your mortgage and then readjusting your payment to reflect your new balance.
While not every lender offers recasting as an option for their mortgage borrowers, some offer this service for as little as $150, a substantial savings when compared to closing costs of a refinance. The only catch is that you may need to post a fairly large sum to the mortgage principal to get started -- possibly $5,000 or more.
Not all loans are eligible for loan recasting. Conventional loans and conforming Fannie Mae and Freddie Mac loans are the most common loans to be eligible for loan recasting, but FHA and VA loans cannot be recast. In general, fixed-rate home loans are the most common to be recast, but some lenders may allow recasting on adjustable rate mortgages (ARMs) or on jumbo loans.
Why consider a loan recast?
As with virtually all mortgage decisions, you should consider your individual circumstances before deciding on a loan recast. For example, if your mortgage rate is considerably above current market rates, it may be a better move to refinance your loan into a lower mortgage rate. If your goal is to pay off your home loan faster, you may be better off making extra payments either on a bi-monthly basis or making one extra payment per year, since a loan recast doesn't shorten your loan term.
But a loan recast may be a good choice if you cannot qualify for a home refinance because of credit issues. When you request a loan recast, you are not applying for a new loan, but simply adjusting the payments of your current loan.
Homeowners who receive a large bonus or an inheritance are prime candidates for a recast. You can use a mortgage calculator to see what your payments will be on your new loan balance after the process is through.
Loan recasting with a home sale transaction
Some homeowners may opt for a loan recast when selling one home and buying another. While it can be difficult to coordinate your home sale and your purchase, if you have the money to pay two mortgages at once, a loan recast could help.
Once your previous home sells, you can use the profit from the sale to pay down the balance on your new loan and reduce your monthly payments. Most lenders will not allow a recast within 90 days of starting the loan repayments, so you may need to wait for a time before you're eligible for a recast in this scenario.
Always be sure to review your overall financial plan when considering a loan recast. If you have extra cash, you may find it wiser to apply it to your retirement fund or to pay off other debt. But if a lower monthly mortgage payment is high on your priority list, a recast could be the right option for you.