Re-Amortizing or Refinancing Your Home

Whether your goal is to reduce your monthly mortgage payments or to pay off your mortgage loan early, several strategies can be applied to help you implement your financial plan. While most homeowners are aware of the benefits and potential pitfalls of refinancing, a less well-known option available to some mortgage borrowers is loan recasting or re-amortization.

SEE: Mortgage Basics: The Amortization Schedule

Loan recasting typically requires you to pay a lump sum toward the principal balance on your mortgage.

While paying extra money to your principal balance allows you to pay off your mortgage earlier, the added benefit of loan recasting is that your monthly payments are recalculated to reflect the new balance. For example, a borrower with a 15-year, $270,000 fixed-rate home loan at 4.25% who recast the loan after one year, with a $75,000 payment toward principal, would reduce the monthly payment from $2,032 to $1,322. Without recasting the loan, the mortgage would be repaid faster, but the monthly principal and interest payments would stay the same.

For borrowers who cannot refinance because of credit issues or low home equity, a loan recast could be a good option because you are not applying for a new loan. Your interest rate and your loan term will stay the same. The only difference is in your monthly payments. A loan recast, because it is not a refinance and does not require a loan application and closing costs is significantly less expensive than refinancing. Refinancing fees often cost around 2 to 3% of the loan amount.

The main reason borrowers choose to recast a loan is to reduce their monthly payments. Some borrowers then continue to make their previous mortgage payments and thus pay off their home loan even faster. Others use the additional cash flow to invest, pay off other debt or save for other purposes.

Another time loan recasting can be valuable is when you buy a new home before your current home has sold. If you can qualify for the mortgage on your new home while still paying for your previous home while it is on the market, you can then do a loan recast with the proceeds after your previous home sells. However, most lenders do not allow a recast until at least 90 days of mortgage payments have been made.

There are some disadvantages to a loan recast. First, you will be required to make a lump sum payment, and some financial planners suggest there are better uses for cash than paying down your mortgage balance. If you lack an emergency savings account, have credit card debt or have underfunded your retirement savings, you may be better off using cash for those purposes.

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

If your goal is to pay off your mortgage faster, you can also simply choose to pay extra toward the principal every month, make bi-weekly mortgage payments or make an extra payment each year in order to reduce the amount you will pay in interest over the life of the loan and to pay off the balance in full faster.

Some borrowers will find that a loan recast is not an option. Generally, only conforming Fannie Mae or Freddie Mac conventional loans are eligible. FHA and VA loans cannot be re-amortized. In some cases, jumbo loans can be recast, but the decision depends on the individual loan and your lender. Your loan must be in good standing. Also, if your loan has been sold to an investor, the investor must agree to a loan recast along with your mortgage servicer.

Before you decide to apply for a loan recast, be sure to compare the financial benefits of making extra mortgage payments gradually, refinancing or re-amortizing to see which option or combination of options will meet both your immediate cash flow needs and your long-term financial goals.