Homeowners may not realize it, but there is a way to cut your mortgage payment and loan principal without having to go through loan modifications. It’s called a mortgage recast, and you can use one to lower your loan amount with no-or-low fees and penalties. You will need some upfront money, but you’ll come out of the process with a lower monthly loan payment — and a lower balance due on your home.

Mortgage recasts may be a necessity, and not a luxury, at a time when more homeowners than ever are having trouble making their mortgage payments. According to Lender Processing Services (Stock Quote: LPS), the number of mortgages delinquent at the end of February 2010 is 21.3% higher than at the same time last year, despite the federal government’s loan modification efforts.

What’s a recast? In a word, it’s a bank industry term for changing — or “re-amortizing” — your loan terms for the remainder of the loan, with the goal of lowering your monthly payments.

The site MoneyNing.com offers a good example of how a loan recast might work:

Let’s say you got a 30 year fixed mortgage for $500,000 at 5%. Plugging the numbers in a calculator, you get a monthly payment of $2684.11. If you paid every monthly payment on time and at the same amount as required, you’d have $406,710.32 outstanding after 10 years. If you re-amortize your loan with 20 years, you’d still get the same monthly payment of $2684.11 since the remaining length of the term is still the same.

Now let’s say that after 10 years, you got a windfall of $20,000 dollars and decided to put it all towards your principal. The resulting loan balance would be $386,710.32, but due to how the mortgage system works, your monthly obligation would still be $2684.11.

However, if you request a loan recast with your $20,000 payment, the situation would change. Because your remaining balance is less now, your re-amortized monthly payment becomes $2,552.12, quite a bit less than the original.

Unlike a refinance, there’s usually no fee associated with a loan recast (and banks that do charge such fees limit them to $150 or $200). However, you do need a substantial upfront chunk of cash to kick-start the process – a lot of lenders ask for at least a $5,000 payment to get the ball rolling. That money is applied toward the remaining principal on your mortgage, reducing your overall loan balance and therefore your monthly payment. It also goes a long way in reducing the amount of interest you’ll pay over the life of the loan.

You have to ask your lender to recast your mortgage, usually in writing. You’ll also have to come up with the upfront money to trigger the mortgage recast. Granted, that’s not easy if you’re struggling financially or out of a job. But if you get a big tax refund, an inheritance, or a cash payout after a layoff, you might consider using that money for a loan recast — it will lower your monthly mortgage payments and save you some decent money on the back end of your home loan.

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