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 Dear
Dr. Don,
I have heard of something called a recast on a home mortgage loan. I believe it is paying off a large chunk of the mortgage and having the taxes and remaining balance recalculated to a lower payment.
What I don't know is if the length in years of the
mortgage stays the same or if you can change the amount of years to pay off the
debt. Have you any advice on this subject?
Thank you,
-- Bewildered
Barb  Dear
Barb,
Recasting a mortgage loan typically comes up in one of three
contexts. The first is when a homeowner wants to pay down principal and have the
loan reamortized. That's the type of recasting you're talking about.
The
second is when a homeowner is in financial distress and wants to extend the term
of the loan to reduce the monthly payment. Finally, a negative amortization loan
is typically recast to a larger monthly payment after the loan balance has increased
by a set percentage, or at a time certain, so the loan will amortize over its
remaining loan term. The balance of my reply will focus on the type of mortgage
recast you're asking about, namely paying down the loan to resize the monthly
mortgage payment. An amortized loan sizes the fixed monthly
loan payment so at the end of the loan, the principal balance is paid off. Bankrate's
Mortgage Payment Calculator also has an amortization schedule that shows how the
monthly payments break down between interest expense and the repayment of principal.
The typical homeowner doesn't recast their mortgage when they
make additional principal payments. Instead the loan is foreshortened because
the additional principal payments have reduced the outstanding loan balance, along
with the monthly interest expense. The monthly payment doesn't change, so the
loan is paid off sooner. You can also use Bankrate's Mortgage
Payment Calculator to see how additional principal payments reduce the total
interest expense and shorten the loan term. Occasionally the
homeowner's goal in making an additional principal payment isn't to shorten the
loan, but to reduce the monthly mortgage payment. For that to happen, the loan
has to be recast. The lender will base the mortgage payment on the new, lower
loan balance and the remaining term of the loan. You can use Bankrate's mortgage
payment calculator to determine the recast payment as well. Not
all lenders offer customers the ability to recast their mortgage. Originating
lenders often sell the loans they originate to investors. The investors aren't
willing to provide that level of flexibility to borrowers, so the loans can't
be recast. Talk to your lender about recasting your mortgage. In
general, the recast option will be to size the monthly payment over the remaining
loan term at your current interest rate. Recasting the loan shouldn't have an
impact on escrow payments for taxes and insurance unless the new loan-to-value
gives you the right to opt out of paying these expenses through an escrow account.
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