A piece in the Wall Street Journal’s website today exposed the well-kept banking secret known as loan “recasting” or “re-amortizing,” a strategy that can help mortgage borrowers lower their monthly payments and save on interest. And I can see why its not talked about that much – it’s just not that useful to most homeowners.
This is the rundown: A borrower petitions his lender and/or mortgage servicer to allow him to make a sizeable contribution to the principal of the loan after which the lender agrees to re-amortize or reset the loan based on the new loan balance.
Here’s the example from the Journal:
For example, a person with a 30-year $300,000 fixed-rate mortgage and an interest rate of 4.75% who recasted one year into the loan by putting in $60,000 toward the principal would trim his balance to $235,371. Assuming there were 29 years left on the loan, that would result in a monthly payment of $1,247 instead of the original $1,565.
That’s nice, but my first thought was: Who has an extra $60,000 laying around to throw at their mortgage?!?! But apparently this is a real savings strategy. The article says that JPMorgan Chase & Co. performs 200 recastings a month (out of 10 million home loans) and Bank of America Corp. performs 200 to 300 (out of 14 million home loans per month.)
Apparently this is a good option for those who want to save money on their mortgages monthly but cannot refinance due to bad credit or who have gotten no-documentation loans before (which most self-employed individuals have to do.) It allows the monthly payments to drop without all the high cost of refinancing, although there are some small associated fees.
I admit this method will save you money, but you first have to come up with the cash (Chase requires a $5,000 contribution, and Bank of America has a suggested minimum of $1,000), and then you must convince the people in charge of the loan to go along with the scheme. It sounds like a lot of work when you could just add extra money to your principal each month or year on your own. It may not lower your monthly payment but it will save you on interest! And if you have all that extra cash, why do you need to lower your monthly payment in the first place?