A New Way to Cut a Mortgage (Wall Street Journal)
Some homeowners who already have refinanced into low-interest-rate mortgages are using a little-known strategy to make their monthly payments even smaller.
Called “recasting” or “re-amortizing,” the strategy allows a borrower to lower the monthly payment on an existing fixed-rate home loan for a small fee without having to apply for a new loan and without having to pay reappraisal and other fees.
Recasting also may enable homeowners to save on interest paid over the life of the loan, merely by putting a large sum of cash against the principal, whether or not they have refinanced already.
The bad news? Banks don’t advertise the strategy, perhaps because it is less lucrative than refinancing a mortgage. And not all loans are eligible. To find out more, you will have to ask your lender directly.
At J.P. Morgan Chase & Co.’s Chase Home Finance unit, less than 200 mortgages a month are recast out of 10 million home loans outstanding, a spokesman says. At Bank of America Corp., about 200 to 300 a month recasting requests are received out of about 14 million home loans serviced by the company, a spokesman says. Neither bank has seen increased demand.
Here is how it works: A homeowner asks his loan servicer if he can put a large sum of money against the outstanding principal on the mortgage. Ordinarily, doing so would enable him to pay off the loan early, but he would still have to pay the same monthly note. But if the lender agrees to recast the mortgage, he may be able to reduce the monthly payment over the remaining term of the loan.
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.
Recasting can be a good choice for borrowers who have cash and want to reduce monthly payments but who can’t refinance, such as those with no-documentation loans, most of whom can’t get the same types of mortgages today due to tighter regulations, even if they have high income and good credit. (Self-employed professionals often find themselves in this boat.) And at a time of low interest rates on certificates of deposit and U.S. Treasury bills, paying off a mortgage early is a relatively safe investment that brings a return at least equivalent to the interest rate on the mortgage itself.
Read the rest of the article here.
Loan modification | admin October 5, 2010
