Is Loan Recasting Right for You?

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?

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4 Responses to “Is Loan Recasting Right for You?”

  1. Barbara responded on 09 Oct 2010 at 12:41 pm #

    My husband and I may need it because we took money out of our home 4 years ago to buy commercial property, with the bad economy we want to put some of that money back into our loan to decrease our monthly payment, but can’t refinance because we are both self-employed and 2009 was terrible. We have 800 credit scores, money in the bank and zero debt aside from our mortgage, but can’t refinance.

  2. Pamela responded on 02 Mar 2011 at 12:52 pm #

    That is only one definition of RECAST.
    In this current housing melt-down, homeowners are able to move in with family or into cheaper housing, and find tenants for their old homes that are upside down. They are asking the lenders to RECAST the current loan to FIT the RENT INCOME for the next five years by ballooning the due date or amortizing over 50 years.
    This option would avoid a lender loss on a short sale and it would work out for everyone after the melt down ends. And it WILL end.
    However, the banks would prefer to force the homeowner into bankruptcy and send the house to foreclosure rather than RECAST the original terms by reducing interest, extending term and re-amortizing any outstanding real estate taxes or past due payments.
    The TENANT pays the rent directly to the lender, so the monthly payment is not skimmed off by the owner.
    WHY ISN’T RECASTING BEING DONE ON A GRAND SCALE instead of that STUPID Obama mod package that I have reviewed, which no one will really qualify for?

  3. bad credit auto loan online responded on 20 Mar 2011 at 11:24 pm #

    I agree, still, care and attention should alway be part of any refinancing process. Always read the fine print of any loan terms. Some higher interest loans can help you repair your credit, but some bad unfavorable loans can just make your problems worse.

  4. jp responded on 17 Jun 2012 at 8:57 am #

    This is a very slanted article and very condescending. This is not a “scheme” as you state in paragraph 3– there are many many reasons why a person would like to take a bit of money and reduce their monthly payments (inheritance, good yearly income, salary bonus, sale of an asset such as a boat or motor home). These people are looking to PAY the bank– not mitigate an existing loan that would cause the bank to lose money.
    Shame on you, Mortgage 101, for not treating this more seriously. Recasting should become as promoted and popular as short selling or loan modification… both of which suffered tremendous growing pains at the start of the housing meltdown.

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