If your fixed-rate mortgage payment is too high, there are a couple things you can do: You can refinance to reduce your interest rate, and you might even consider a "cash-in" refinancing, using spare cash to reduce the loan balance, cutting your monthly payment even more.
But what if your rate is already low, and you don’t want to drop more cash on a new appraisal and title insurance?
In that case, there’s an often-overlooked third alternative: a mortgage "recast" or "re-amortization." Lenders aren’t required to do this, but it’s worth asking.
In a recast, the borrower makes a substantial payment to reduce the loan balance. The lender then recalculates the monthly payment based on the lower balance, using the same interest rate and time remaining under the original mortgage terms. Because the borrower still has that loan, there is no costly appraisal or title search.
The process is slightly different from simply making a lump-sum pre-payment on the original loan. When that is done with a fixed-rate mortgage, payments remain the same. The borrower benefits by paying the loan off earlier, saving interest charges in the long run.
Imagine you had taken out a 30-year fixed-rate mortgage five years ago for $300,000, at 6%, the going rate back then. Your monthly payment would be just shy of $1,800, according to the Mortgage Loan Calculator.
After five years, your loan balance would be $279,163. If you paid that down to $200,000 and then had the lender recast the loan, your payments for the next 25 years would be just short of $1,300, a $500-per-month reduction.
Of course, in this case, it might pay to use some of that cash to refinance, as new 30-year loans are averaging around 4.44%, according to the BankingMyWay survey. That way you’d save two ways, cutting the loan balance and the interest rate.