Despite the well advertised loan modification programs designed to help homeowners who are having trouble making their monthly mortgage loan payment, millions continue to come up short when that payment date arrives. There are some homeowners who are so underwater, foreclosure is unavoidable. Many others however would be able to get back on track financially if they could just lower their monthly payments. Traditionally the only way to accomplish this was through the refinancing of a mortgage loan. Unfortunately not all homeowners qualify for a refinance and for those who do, the costs put that option out of reach. The good news for homeowners is that there is another way to lower mortgage payments beyond refinance. This option is known as recasting or re-amortizing and here we will look more closely at this option and how it can help homeowners stay in their house.
Recast versus refinance
Both options can help lower your mortgage loan payment however they each have their own unique process. When you refinance your mortgage loan you are actually taking on an entirely new loan which requires filling out plenty of new paperwork, a new appraisal of your home and coming up with money for closing costs. The purpose of a refinance is to get a lower interest rate which then reduces your monthly payment.
When you recast your mortgage loan you are not actually getting a new loan, therefore you avoid much of the tedious and costly requirements needed for the refinance. When a lender agrees to a recast, they essentially re-amortize your loan which means the remaining principal and interest payments are lowered as a result of a new amortization schedule. Where a refinance might add an additional financial burden at a time when you can least afford it, a recast is generally at no cost to you or there may be a small flat fee depending on your lender. It is important to note that you may be required to make a payment to lower the principal in order to qualify for a recast.
Tax consequences of a mortgage loan recast
When a recast calls for a payment that is applied directly toward the principal balance, homeowners will see reduced interest payments. The result will be a lower amount of mortgage interest that can be claimed as a deduction when the homeowner files their tax return.
How to get started
By all accounts, the most difficult part of obtaining a mortgage loan recast is convincing the lender to go along with the idea. Lenders are not required to accommodate homeowners who request a recast, however in most cases a lender will be just as interested in helping you keep your loan current as you are. It is recommended that you make your request for a recast in writing and keep all documentation related to the process safely filed with other important financial documents. There are some situations where a lender will automatically recast a loan, for example most ARM loans have a scheduled recast date established in advance.
