Shrink Payments with Mortgage Recast

Some lenders offer homeowners a chance to lower their monthly payments by "recasting" or "re-amortizing" their current home loan, avoiding the hassle and expense of refinancing. While lenders rarely advertise this service, which costs as little as $250 in some cases, loan recasting can be requested by customers.

To understand why a homeowner would want to recast a mortgage, it helps to understand first what recasting is and how it is done.

How Loan Recasting Works

"A recast is when a customer wants to apply an additional sum of money to substantially reduce the unpaid principal balance of their loan and lower the monthly payment," says Kris Yamamoto, senior vice president of corporate communications for Bank of America. "The customer's loan term and interest rate remain unchanged. However, re-amortizing the loan based on the newly reduced principal amount would result in a lower monthly payment. Upon request to recast a loan, we would confirm that the investor of the loan allows recasting and ensure the customer is current on their payments. Typically, only fixed-rate loans can be recast, but adjustable-rate loans may be considered on a case-by-case basis."

Wells Fargo spokesman Tom Goyda says loan recasts are rare, in part because not all loans are eligible.

"Conventional, conforming Fannie Mae and Freddie Mac loans are generally eligible, but loan recasts are not allowed on FHA and VA loans," Goyda says. "Recasting a jumbo loan depends on the individual loan."

Goyda says that when interest rates are low, borrowers are more interested in refinancing to a lower mortgage rate. Other customers opt for a free biweekly mortgage payment plan to pay off their loan more quickly by making extra principal payments each year.

"If the goal is to pay off your mortgage faster, a free, biweekly payment plan is a better option," Goyda says. "A loan recast lowers your payments, but it doesn't shorten your loan term."

Bank of America and Wells Fargo Home Mortgage charge customers $250 for a loan recast. At Wells Fargo, customers must make a lump sum payment of $5,000 or 10 percent of the remaining loan balance, whichever is greater, to qualify for a loan recast.

Portfolio Modification Option

At M&T Bank, customers may request a loan modification rather than loan recasting.

"Our loan modification program is available only to customers whose loans we hold and service," says David Skaff, mid-Atlantic regional manager for mortgages for M&T Bank. "We re-amortize the loan based on a lower interest rate and on the remaining outstanding balance of the loan, but we keep the term the same. So if there is 23 years left on a 30-year loan, they will still have 23 years until it is paid off."

The M&T Bank program costs about $1,500 to $2,000 and does not require an appraisal or closing costs. Homeowners must be up-to-date in their mortgage payments and have a minimum credit score of 680.

"The advantage to this program is that even if you are underwater, you can take advantage of a lower interest rate with us," Skaff says.

Why Request a Loan Recast

One of the most common reasons for a loan recast, particularly when the real estate market is sluggish, is that some people buy homes before they sell their previous homes. They end up paying two mortgages temporarily. When their previous home sells, they can use the proceeds to pay down the balance and recast their loan.

"While a loan recast cannot be done within the first 90 days of a loan, after that, borrowers can use the proceeds from the sale of their previous home to reduce the principal on the new loan and therefore reduce their payments through re-amortization," Goyda says.

Yamamoto says loan recasts are not unusual at Bank of America, and often occur when a customer inherits money or receives a large bonus and wants to pay down the mortgage balance.

Before requesting a loan recast, borrowers should consider their goals and options.

"If your main goal is to reduce your monthly payments rather than pay off your loan faster, a recast could be a good option," Goyda says. "However, the decision should be based on an overall financial plan. If you have other debts to pay or want to make other investments, you might want to use the cash for something other than paying down your loan balance in a lump sum. I would recommend that someone consult with a financial adviser."

Skaff suggests that homeowners ask their lender what their options are if they are thinking of refinancing because a loan recast, a streamlined refinance with the same lender or a portfolio modification could be a better choice than a standard refinance.