Interest rates have fallen again, and refi ads are popping up everywhere. But over the last several years, most people have already taken advantage of the low interest rate environment and refinanced their mortgage. When you consider the closing costs, it may not make sense to refinance again. Is there anything else a homeowner can do to lower their monthly housing cost?
While not appropriate for everyone, there is another mortgage-related strategy called recasting (or re-amortization), and it works like this: The homeowner makes a one-time payment of principal (minimum amount varies), and then asks the mortgage holder to reset the monthly payments according to the original terms of the loan. This end result is a lower monthly mortgage payment with no change to the length of the loan.
It’s really quite simple, and while they usually don’t advertise it, lenders in Texas are required to offer the service. Most conventional loans are eligible for recasting, but FHA and VA loans are not. Typically, the lender will charge a fee for this service (usually less than $500), but there are no closing costs or credit checks.
Recasting is not the same as making extra principal payments. Paying extra towards your principal each month will help to pay off your mortgage faster, but it will not lower your required monthly payment. When you recast a mortgage, you actually experience the benefit of a lower monthly obligation in exchange for a one-time payment of principal.
For some, reducing their monthly fixed expenses is an important goal, and recasting can help in that regard. It also works well for the person who purchases a new house prior to selling their old house. Once the old house sells, they can use the proceeds to pay down their new mortgage and recast the remaining balance. Similarly, recasting is a potential strategy for any prospective homebuyer who may not have a large cash down payment today, but is expecting a significant windfall (e.g., sale of business) in the near future. Lastly, recasting can serve as a useful tool for those who are unable to refinance due to self-employment income or less-than-stellar credit.
In summary, this is a seldom-used strategy, but it could be of great benefit to someone you know. If you have any questions, don’t hesitate to contact us.