Re-Amortizing or Refinancing Your Home

Whether your goal is to reduce your monthly mortgage payments or pay off your mortgage loan early, several strategies can help you. Most homeowners are aware of mortgage refinancing. Refinancing lets homeowners rebook their mortgage loans to take advantage of lower interest rates. However, not all borrowers can qualify for a mortgage refinance. A lesser-known option for some borrowers is called a re-amortization or loan recasting.

What Is Loan Recasting?

Loan recasting or re-amortization typically requires a borrower to pay a lump sum toward the balance owed—called the principal—on the mortgage. The remaining payments are recalculated based on the new, lower principal balance. A new loan payment schedule is then created—called an amortization schedule.

Essentially, the payment schedule is recalculated to reflect that the mortgage loan now has a smaller loan balance due to the principal payment.

Reasons to Recast a Loan

Typically, borrowers choose to recast a loan to reduce their monthly payments. However, some borrowers continue to make their previous mortgage payments and thus pay off their loans sooner. Others use the additional monthly cash flow savings to invest, pay off debt, or save for other purposes.

Another time loan recasting can be valuable is when a borrower is buying a new home before their current house has sold. If a borrower can qualify for the new home mortgage while still paying for the previous home, a loan recast can be done. The proceeds from selling the previous home can be used, in part, to pay down the principal on the new house. However, most lenders do not allow a recast until at least 90 days of mortgage payments have been made.

A Big Reason Not to Recast a Loan

While being unable to refinance because of legitimate credit issues is a reason to recast, being unable to refinance due to discrimination is not. You should never feel like you are stuck paying overly high interest rates or otherwise exploited by your lender. Many mortgage lenders do not discriminate, and they are willing to lend to you at prevailing market rates.

Advantages of Loan Recasting

There are advantages to performing a loan re-amortization or recasting that homeowners should be aware of before refinancing or recasting their mortgage.

Lower Monthly Payment

Paying extra money toward your principal balance allows you to pay off your mortgage earlier. However, the added benefit of loan recasting is that your monthly payments are recalculated to reflect the new balance.

Credit Issues

A refinance of a mortgage is somewhat of a misnomer since the process is similar to applying for a new mortgage loan. That includes a new loan application, income verification, and a credit check. For borrowers who cannot refinance because of credit issues or low home equity, a loan recast could be a good option because they aren't applying for a new loan.

A typical refinance involves booking a new loan, changing the interest rate, and the loan term. However, the recast keeps the original loan intact and only changes the monthly payment.

Lower Fees

A loan recast can save on refinancing fees since a loan recast doesn't require a loan application. As a result, the closing costs are significantly less expensive for loan recasts versus refinancing. Refinancing fees can cost approximately 2% to 3% of the loan amount. In other words, a $200,000 mortgage refinance could cost $4,000 in closing costs and fees (2% * $200,000). When refinancing, the new interest rate must be low enough to recoup the thousands of dollars in closing costs.

Disadvantages of a Loan Recast

However, just as there are advantages to performing a loan re-amortization or recasting, there are also some disadvantages that homeowners should be aware of before making a decision.

Lump-Sum Payment

Coming up with the money for the lump-sum payment can be quite challenging. Some borrowers simply don't have tens of thousands of dollars in their savings accounts to make principal payments on their mortgages.

Also, some financial planners suggest there are better uses for cash than paying down the mortgage balance. For borrowers who have credit card debt, an underfunded retirement account, or lack an emergency savings account, paying down the mortgage principal might not be the best financial decision.

No Change in Interest Rate

Another disadvantage, depending on the mortgage terms, is that a re-amortization will not reduce the loan's interest rate. When mortgage rates are low, homeowners might be better off refinancing, even with closing costs. Some borrowers choose to refinance first, then to re-amortize within a year or less to reap the benefits of both financing options.

Paying Off the Mortgage Early

Suppose the goal is to pay off the mortgage faster. In that case, borrowers might be better off paying extra toward the principal every month or making an extra payment each year. The extra payments over time will reduce the total amount of interest paid over the life of the loan. Paying off the mortgage sooner is an additional benefit.

Exclusions Exist

Unfortunately, a loan recast is not an option for all types of mortgages. Generally, only conforming Fannie Mae or Freddie Mac conventional loans are eligible. FHA 203(k) loans and Veterans loans (VA loans) cannot be re-amortized.

Jumbo loans can be recast depending on the lender, and there are stipulations. For example, the loan must be in good standing. Also, if the loan has been sold to an investor, the investor must agree to a loan recast along with your mortgage servicer.

Example of Loan Recasting vs. Refinancing

For example, let's say a borrower is considering whether to refinance their mortgage or recast the loan. The borrower initially had a 30-year mortgage for $350,000 at a 4.25% interest rate with a payment of $1,722 per month.

The borrower now has 15 years left on their mortgage with $240,000 remaining on the loan balance. The borrower is considering refinancing into a 15-year mortgage or recasting the existing loan.

Recast

• The borrower pays $40,000 toward the principal, meaning the new loan balance would be $200,000.
• The monthly payment would be reduced from $1,722 to $1,505.
• The savings from the new monthly payment would be $217 per month.
• The interest rate would remain at 4.25%.

Refinance

Let's say the new mortgage rate for a 15-year loan is currently 3.20%.

• The new monthly payment would be $1,681 at the refinanced rate.
• Monthly savings would be $41 ($1,722 – $1,681).
• Closing costs and fees were $3,000.
• It would take 73 months or six years based on the savings of $41 per month to recoup the closing costs.

Comparison

Suppose the borrower's goal was to save on monthly payments and avoid the closing costs of refinancing. In that case, it appears that the recast would be the better option. However, the recast costs the borrower more in the long term.

Although the recast provides a lower monthly payment, the interest rate of 4.25% is higher than the refinancing rate of 3.20%. Consequently, the interest on the recast mortgage would exceed interest for the refinance when the 15-year loan is finally paid off. The recast interest would equal $70,820, while the total interest with refinancing would be only $62,504.

What is more, the refinancing allows the borrower to save the principal payment of $40,000 used in the recast. Those funds could be invested in a savings account and earn interest during those 15 years. A borrower must consider interest savings from refinancing and closing costs versus monthly payment savings from recasting along with the principal payment.