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Dear Dr. Don,
I have read some information about recasting my home mortgage loan. Here is my situation. I have 15-year fixed-rate loan
for $540,000 at 6.125 percent. I want to pay it off as fast as I can.
Over the past eight months, I have made monthly payments of about $6,000. I also recently made a lump-sum
additional principal payment of $110,000. My mom gave me this money with no interest.
I want to recast my loan to reduce the monthly payment and shorten the loan term. I checked with an
employee of my bank's loan department. He said that he had never heard about recasting a home loan.
Is he lying to me or playing dumb? Maybe he just doesn't want to help me out. Please provide your expert
advice ASAP.
-- Dezi Details
Dear Dezi,
This is a common dilemma in home mortgages. You make additional principal payments and expect to see the monthly loan payment
reduced, but it's not. To get a reduction in the monthly payment (due to the additional principal payments you've made), you
need the lender to recast your mortgage.
It's not mandatory for a lender to recast your mortgage. Some lenders do it as a convenience for their customers,
and for the lender to hold on to a loan that might otherwise be refinanced. So, it's doubtful your lender is playing dumb to
avoid helping you out.
Keep in mind that most originating lenders don't hold your loan in their portfolio. They package your loan with
others and it is sold to investors. The loan servicing can also be spun off from the loan, so where you make your payments doesn't
have to be related to who owns your mortgage.
By my calculations, your monthly principal and interest payment is $4,593.37. Any required escrow payments for
taxes and insurance would increase that amount. The additional principal payment of $110,000 could reduce the monthly payment
to about $3,657.69 if the loan was recast, a reduction of almost $1,000 a month.
These numbers are rough. Use Bankrate's Mortgage payment
calculator with your actual information to come up with exact dollar amounts.
I'm guessing your motivation in trying to recast the loan is that you want to hold on to the interest rate
and avoid the closing costs that would come with a refinancing. Well, that only works if your lender is willing to recast
your loan. Your lender doesn't appear to be ready, willing or able to do so.
If your goal is to pay off the loan as fast as you can, then keep plugging away at it with the additional
principal payments. The loan term will be reduced based on these payments -- you just won't have a reduced monthly mortgage
payment. Bankrate's mortgage payment calculator has a loan amortization feature that will calculate how these payments reduce
the life of the loan and the total interest expense.
An earlier column, "Looking at a
mortgage recast," has more on this topic.
I'd also suggest that your mother review the tax implications of her gift to you with her tax adviser --
regardless of whether it's a gift of interest or principal.
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