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.