The housing debacle remains impervious to improvement for millions of homeowners who find themselves unable to sell, unable to refinance and unable to move on with their lives. The post-2007 tightening of loan guidelines prevents many from using the traditional method of changing a mortgage loan, refinancing. For some the solution may be in the newly-popular loan recast offered by some banks. It’s not publicized, but some banks will do it.
What is a Loan Recast?
With a loan recast, the borrower puts a significant amount of cash into his current mortgage principal. The principal may be underwater or may show equity, even significant equity. Let’s say the borrower has just received a large inheritance or settlement and would like to take a chunk of it and apply it to his mortgage. Assuming the bank agrees, the loan is then re-calculated, re-amortized at the same rate and terms. The borrower can now look forward to lower mortgage payments throughout the life of the loan.
Loan recast differs from a loan refinance in several ways. For one, the fees are usually minimal, around $150, compared to the thousands of dollars required to refinance a loan. Second, instead of taking money out of the equity as in some refinances, the homeowner puts money in with the goal of lowering the principal owed. Third, the terms and conditions of the loan do not change, though due to the payment to the principal, the payments will be lowered. How significant the change depends totally upon the amount put into the loan. Of course, since the borrower is giving money to the bank rather than asking to borrow more, the borrower does not have to supply credit report, tax returns or other financial information.
Some Loans Cannot Be Recast
For those with FHA or VA loans, the issue is simple: the loans cannot be recast. These are government-backed loans and are simply too complicated to allow it. Then, many lenders will not recast adjustable loans [ARMs] or jumbo loans. Also, many banks simply do not offer loan recasting and even those that do must be prodded and poked into offering the service . The borrower must be proactive.
Who Would Benefit?
Obviously, the main beneficiaries of a loan recast would be those who already have their mortgages at low fixed rates. If the interest rate is higher than, say, 5%, it’s usually not worthwhile for the borrower to pay it down unless absolutely no other option is open. Above 5% interest, all things being equal, it makes more sense to seek out a refi. Also, since the payments of adjustable rate mortgages can easily be changed simply by adding the extra money to the principal as the rates re-adjust every few months or every year depending upon the terms of the note, most borrowers with ARM mortgages do not need to recast their loans.
Loan recasting may apply even to underwater homes. Assuming that the homeowner is current in his present payments and determined to stay in the home no matter what and, further, is convinced that with time and patience the home will rise in value, the underwater homeowner may decide that a loan recast is the best option. Though the government and numerous housing advocacy groups have suggested principal reduction to the banks as a way to alleviate the housing crisis, by now it is pretty clear that forgiving debt is the last thing that the banks want to do. With a loan recast, homeowners take matters into their own hands.
Loan recasting is not by any means a panacea as it can apply only to a few. The borrower must have a significant amount of money to put into the mortgage, must be current, must have a fixed mortgage and must be satisfied with the current terms and conditions. For those who do meet these criteria, loan recast is yet another financial tool to help weather the housing downturn.