November 2010: Real Estate

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Wouldn’t it be great to use some of the cash tied up in your monthly mortgage payment for other purposes, such as investing in a child’s college fund, or saving for that long-awaited addition to your house? 

 

There is a way to do this without having to go through the rigmarole of refinancing, which often includes hefty processing and appraisal fees or expensive private mortgage insurance. It’s called recasting or re-amortizing a mortgage, and it’s a way to free up cash by lowering the monthly payment on an existing fixed-rate loan for a small fee, without having to apply for a new loan. Recasting is not commonly advertised by lenders because the business of refinancing can be so much more lucrative. With recasting, the interest rate and number of payments stay the same, but the monthly payment itself is reduced.   

How it works: A homeowner puts a large sum of money toward the outstanding principal on the mortgage. Ordinarily, doing so would enable the homeowner to pay off the mortgage early but the amount of the monthly payment wouldn’t change. She writes to her lender and asks for permission to recast the loan. This usually involves a fee, anywhere from $150 to $500. Once approved, her monthly payments drop; she’s able to keep more of her money in her pocket and potentially save on interest over the life of the loan.  

An example provided by Matt Hodges, loan officer and owner of Compass Home Loans: A homeowner has a windfall of $50,000. She decides to use that money to pay down her  $200,000 mortgage with a 5 percent interest rate, 30-year term, for which she’s been paying $1,074 a month —including principal and interest—for the past five years.  “There’s approximately $48,000 in ‘sunk’ interest already paid and approximately $138,000 in interest to be paid over the next 25 years,” he says. “By recasting the loan, she’s able to lower her monthly payments to approximately $787, saving $287 per month and approximately $37,000 in interest over the life of the loan.”    

“Recasting is a good option for people who have cash but want or need to reduce monthly payments,” says Hodges—“such as folks living on fixed incomes or people who’ve just been laid off and need to trim monthly spending.”  It’s also a good option for people who can’t refinance due to recent tighter lending regulations. 

Recasting can also be a worthwhile investment vehicle—$37,000 in saved interest over the life of the loan isn’t chump change—especially if the homeowner invests the saved $287/month in the financial markets, certificates of deposit or U.S. Treasury bills. 

Sounds good, right? 

The main glitch, of course, is having a chunk of cash available to pay down the loan in the first place. 

A few other roadblocks: The lender may not approve the request to recast. “Many times the lender will not allow recasting until one year’s worth of payments have been received,” says Hodges. “There can be no late payments in the last year.”  

There are tax considerations as well, since mortgage interest on a primary residence can be tax-deductible.   

Before you ask to recast, talk to a financial advisor or an accountant to find out if this is the best use of your money. They may determine that in this market, you’ll have a higher rate of return over the long haul by investing that chunk of cash in something other than your home.—Jessie Knadler

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