Whether you live in Bethesda, San Francisco or New York, refinancing for a lower mortgage payment is always appealing. But the fees and credit requirements can be burdensome.
According to a recent New York Times article, there is another, lesser-known option called “recasting” or “re-amortization” that can work just as well. Basically, you lower your principal with a lump sum of cash and then reset your monthly payments based on the original interest rate and loan terms. Because your principal has been reduced, your monthly payments decrease and you save on your total interest for the loan. The larger the lump sum you can provide, the more you save. Just making extra payments without recasting only shortens the length of the loan. It doesn’t reduce your monthly cost.
However, there are some stipulations. Finding a lender that even offers this service can be challenging, and those that do can have restrictions. Many lenders exclude FHA and Veterans Affairs loans. Lenders who do offer this service often require a minimum payment toward the principal and charge a fee. At JPMorgan Chase, the required minimum is $5,000 with a $150 fee. In addition, interest-only and adjustable-rate loans generally aren’t eligible, and a borrower must be current with all mortgage payments.
Lenders aren’t obligated to recast mortgages, and most don’t advertise it. But in an effort to be more customer-service-focused, they will consider requests on a case-by-case basis.
This scenario typically works well for those who might not qualify for refinancing due to bad credit or self-employment. It’s also good for anyone with extra cash like a year-end bonus, a tax refund, or proceeds from the sale of another property. It doesn’t make sense for anyone with interest rates of 5 percent or lower, since the extra cash would yield more being invested in something with a higher return.
Whether you choose refinancing or recasting, make sure it’s the right decision for your current situation. Don’t rob Peter to pay Paul just to get a lower interest rate.
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