Because homeowners run into financial difficulties from time to time, mortgage lenders offer loss-mitigation options to help struggling homeowners keep their homes. Even homeowners who aren't in financial distress might want a way to lower their monthly payments. Refinancing is the most common way to get a lower mortgage payment. However, many lenders are willing to figure out a better repayment plan, without a refinance. Your financial circumstances and your lender will determine whether you can reduce your payments without refinancing.
Whether you simply want to avoid the cost and hassle of a refinance, or can't qualify due to equity and credit problems, you have a few choices for lower payments:
- Recasting or re-amortization
- Interest-rate reduction, or loan modification
- Principal balance reduction
A Lump Sum Can Lower Your Payments
Normally, paying down a large portion of your principal balance ahead of schedule won't change your monthly payment. However, requesting a recast or re-amortization of your mortgage can change both your principal and your payment. The best candidates for this option have a large sum of money to apply toward their mortgages. The lender then recalculates payments based on the newly reduced principal amount, making the payment lower.
Call your mortgage lender or the company that handles your monthly payments, known as a loan servicing company. It can check with the investor on your loan -- if there is one -- and tell you whether recasting is permitted. This option is rare and isn't usually publicized, but if allowed, the administrative fee is modest -- usually only a few hundred dollars. Unlike a refinance, which pays off an old mortgage with proceeds from a new loan, a recast doesn't change your loan's interest rate or terms and doesn't require a credit check.
Interest-Rate Reductions and Loan Modification
A lender can temporarily or permanently reduce your mortgage rate to lower your monthly payments. A rate reduction is typically reserved for financially distressed homeowners. Lenders and the loan investor must agree to the rate reduction. Requesting it usually requires you to apply for a larger loss-mitigation option known as a loan modification. The federal government sponsors loan modifications and lenders may offer their own proprietary programs to qualified borrowers. The modification process is often long and drawn out, and the results are not guaranteed. You have to prove you can't afford your current payment and don't qualify for a refinance, but still earn enough to make a new, reduced payment. Contact your lender and explain your financial hardship. If you are a good candidate for a rate reduction, your lender will instruct you on how to submit a hardship package and modification application.
Principal Reduction Plans Also Lower Payments
Another option for struggling homeowners, albeit more rare, is a principal reduction plan. It's available to borrowers who are underwater on their mortgages. Because the borrower owes more than the home is worth, the negative equity prevents a refinance. The lender must be willing to reduce the mortgage principal balance, which in effect lowers the monthly payment. Although the federal government has a principal-reduction program, lenders aren't as open to lowering loan size as they are to other forms of loss mitigation and modification. You typically must apply for a loan modification and fail to qualify before a lender will consider forgiving a part of your loan balance.
- House Logic: Recasting Your Mortgage: Refinancing’s Forgotten Sibling
- Bankrate: What Is Mortgage Recasting and Why Do It?
- NYTimes.com: A Little-Known Strategy for Cutting Mortgage Payments
- Bankrate: Borrowers Look For Mortgage Modification
- Washington Post: Principal Reduction for Underwater Homeowners Not Off Table, Official Testifies