Dear Dr. Don,
I bought my home in December 2007. It was a foreclosed property purchased for $37,065. I originally planned to have the house rehabbed at a cost of about $25,000 but, due to the economy, I changed my mind and canceled the rehab project.
My lender has informed me that I need to recast the loan and have the money going toward my principal. But after reading your definition of recast, I don't think this is what I want. I did not use the money at all, and would like for the loan to be recalculated to the price of the house only ($37,065).
Should I refinance the loan? I don't really want to because I have a very good interest rate of 4.5 percent, so what is your best advice?
This is my first mortgage. The loan is a 30-year fixed rate first mortgage with the NACA Mortgage Association. The loan amount was for both the purchase price and the costs to rehab the home. I'm eight months into the mortgage and the loan balances is a little over $60,000.
-- Bettie Borrows
I don't know anything about the NACA Mortgage Association, but the Neighborhood Assistance Corporation of America, or NACA, has a commitment to fight predatory lending and advocate for neighborhood stabilization.
It also has a purchase/rehab lending option that jibes with what you originally planned to do with your home. There's a $10 billion pool of mortgage money available at below-market rates to help people keep their homes and to stabilize neighborhoods.
You borrowed money from a mortgage lender to buy and rehab a home, and now you don't want to rehab the home. Fair enough, but the lender may have some issues with you not rehabbing if your failure to fix up the home causes it to decline in value. Fixing a leaky roof, for example, protects the lender's interest in the property, as well as your own.
From your note, however, it sounds like this isn't an issue with the lender and the focus is on how you need to address the $25,000 part of the mortgage that you no longer plan to use in rehabbing the home.
A homeowner making additional principal payments on her mortgage doesn't see a reduction in the monthly payment. Instead, the additional principal payments reduce the monthly interest expense, allowing more money to go toward principal repayment. The monthly payment doesn't change, but the loan gets paid off more rapidly than the original loan term.
Having the lender recast your loan reduces the monthly payment by reducing the loan balance, but not changing the loan term, or the interest rate. In your case, the loan remains a 30-year fixed rate mortgage, but instead of a $60,000-plus loan balance, the loan balance is now $35,000-plus. Your monthly payment is reduced from about $315 to about $180. You can use Bankrate's mortgage payment calculator to figure out the exact payments.
The lender wants you to recast the loan because you borrowed $25,000 to improve the property and now aren't spending the money on improvements. You should want to recast the loan so you don't spend the next 30 years making interest payments on money you didn't need for the house.
You might what to hold on to the money and invest it elsewhere, but that isn't really fair to the lender. I don't know the loan terms, so I don't know if the lender can require you to repay the money, but recasting the loan at your original interest rate is a good idea for both sides.