Have you ever recast your mortgage? Do you know what it is, and how to request one from your lender?
Now that I firmly planted my foot in the land of the unfree with a fresh new mortgage, I set out to see if there are any quick and painless ways to reduce my mortgage. While I was speaking with my lender over the phone, we talked about a loan recast, where my lender can lower my monthly payment for no cost.
No, not a refinance. A loan recast to lower your mortgage payment with no up front cost.
What is a Loan (Mortgage) Recast
Basically, a loan recast is just a fancy way term for re-amortizing your loan schedule with the remaining terms of the loan. Here’s how it works.
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. No surprise there.
Now let’s say that after 10 years, you got a windfall of $20,000 dollars and decided to put it all towards your principle. 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.
Benefits of a Loan Recast
Remember that a loan recast only lowers your monthly obligation, and is not the maximum that you can pay towards your mortgage. Once your monthly payment is lowered, you can still pay your original amount and have the extra go towards your principle.
For the disciplined, this could be a wonderful option because it brings more flexibility without cost. Remember, a loan recast doesn’t cost you a thing.
Caveats of Recasting Your Mortgage
Though I hear that many lenders will do it, none of them are required to recast your loan. If this interest you, check with them to see if this is even possible. Also, most lenders require a substantial minimum payment towards principle to honor such requests (during my research, I read the $5,000 number quite a few times), so again, check with them before you make any plans.
Also make sure, and this is ultra important, to ask yourself whether this makes sense for your own situation.
Flexibility always comes with responsibility. Does a lower payment just give you more purchasing power to spend more. Are you still going to put your monthly towards your mortgage, or does it just mean more shoes this month?
Is a Loan Recast in Your Near Future?
So, will you be planning to call your lender up to get a no cost monthly payment reduction? I know I will, if only to give me the flexibility just in case.