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Dear Housecat

NEW! Wake Forest NC Business at WakeForest.Biz is proud to announce we will have columns from the Housecat! The first Dear Housecat syndicated column weíre featuring is about recasting, rather than refinancing a mortgage, getting rid of PMI, and the importance of understanding your mortgage amortization schedules.

July 2005 Syndicated Column from Housecat, Copyright 2005, AeroScore, Inc.

 

How I reduced my monthly mortgage payment by 22.5% without refinancing.

I knew my job was going to be outsourced to a third world country. I just didnít know when. Sure, I have plenty of skills, but once youíre over 50, companies with good paying jobs will not hire you.

I also didnít want to get stuck with a $755 per month mortgage payment for 30 years since I knew the corporate downsizing was inevitable.

It was 2002. I had just bought my house. It was humble enough, with just over 1000 sq ft. Still, a mortgage on even a humble house is a difficult commitment in todays economy, when people are losing their jobs left and right, and discrimination in hiring those over 50 is so rampant. It was bad enough the company outsourced my job to India, but when they ripped off $18k from my pension, which would have been secured in just months, it was another low blow. Taxes are climbing out of control. The stock market keeps going down. Enron showed how corporations treat employess and their investors. Government showed it is just as corrupt as ever, and favors rich people rather than the working class.

The future looked miserable. I knew I had to act while I still had the job.

I reduced my mortgage just in time. My job was outsourced to India in the name of corporate profits. Next time your computer breaks down and you call the helpdesk and hear someone with an accent, ask where theyíre from. Thatís the poor bloke who got my job.

My know-how had saved the companies I worked for millions of dollars over the years. It was time to start using some of my brain power to save myself some money.

Within months, I reduced my mortgage payment by 22.5%, down to $585.

In 2002, as soon as I paid off all my bills, was still employed, and had a good enough credit rating, I bought my little house for $105k with a 5% downpayment. When youíre not in good financial condition, you donít catch any breaks. You pay PMI if you donít pay at least a 20% down.

Private Mortgage Insurance - PMI is a waste of money for a financially strapped homebuyer, but they say you have to pay it, because without it they wonít approve your loan. That $56.59 I was paying might seem low to you, but if you donít do something about it, you will have to pay it every month for years and years, and the result is thousands of dollars you could have used to pay down your mortgage.

Pay down the mortgage. Thatís key. If you didnít start with at least a 20% down payment when you got your mortgage, you probably got the worst interest rate, in addition to having to pay PMI. In the first 10 to 15 years of paying your mortgage, you are paying more interest than principal.

The mortgage company is not obligated to help you get rid of PMI. There are certain obligations your mortgage company does have. Thus, as soon as you are down to your mortgage being 80% of your homes equity, you may need to do some things in order to have your mortgage company remove the PMI. Contact your mortgage company and find out what they need in order to consider you for elimination of PMI. Quite often, you will need to have an appraisal done, at your expense, but you may not have the right to choose the appraiser.

In my case, the home was bought so recently that there seemed to be no valid purpose for getting an appraisal, and it would cost me a few hundred dollars. However, that was part of their terms, and try as I might, there was no getting a waiver.

The object here is, that if you can get your mortgage down from having only 5% paid off to having 20% paid off, not only can you get rid of PMI, but you can do other things as well.

The effect of removing PMI brought my monthly payments to my mortgage company from $755 to less than $700. There are two ways to look at this. I prefer the first: The reduced monthly payment obligation allows me to take the $56.59 and apply it to the principal each month. Others may think of it as more money in their pockets, but they would be wise to consider paying off their principal.

The other way I reduced my monthly mortgage payment is by recasting it.

Be it ever so humble, thereís no place like home.

RECASTING A MORTGAGE

Many people think their only alternative to reducing their monthly mortgage is to refinance. Of all the people I talked with at the bank, and at the mortgage company, most never even heard of the term RECAST.

All of the reference material I found related to recasting was written from the standpoint of how people who are having serious problems might be able to get the mortgage company to recast the mortgage. There was no reference for people who wanted to recast as part of solid financial planning.

If you do not have any equity in your house, and you do not have $5000 you can apply to your principal, recasting is not right for you. However, if you can get the $5000, and if you have equity, you should be able to recast. The mortgage company may charge you a fee - often $300.

So, it is kind of ignorant to use recasting only when in trouble. If you are already in trouble of not being able to meet your mortgage payments, it is ridiculous to think you are going to be able to come up with $5300. RECASTING really only makes sense as part of solid financial planning.

UNDERSTAND YOUR AMORTIZATION SCHEDULES

If possible, do what I did. I created an awesome amortization spreadsheet program using amortization algorithms. It is so flexible I can use it to do what-if projections. I can plug in a principal prepayment and immediately see the amoritizing effect. Iím no banker, but I was able to come within two pennies of the projections done by my mortgage companies computers.

It is only by understanding amortization that people can full appreciate the effect of payments applied against their mortgage principal.

Again, knowing that my job would be in jeopardy of being outsourced overseas within the next 2 years, I began paying off my principal in advance. This increased my equity, but it was doing nothing for the reduction of monthly payments. Once I drove the equity down so that the principal balance remaining was about 80%, I asked what my mortgage company required for removal of PMI. They said that due to my having the mortgage for so short a time, I would have to bring the principal balance to 78%. I met all their requirements. With the removal of PMI, I was now paying less than $700.

However, my goal was to get my monthly payment reduced to less than $600 per month. Many people think the only way to reduce monthly payments is to reduce the amount they pay into escrow. Highly paid financial planners will often tell you to increase the deductible of insurance you carry. To a point, this is valid. If you are in a frequent disaster prone area like tornado alley, or on the Florida keys, it might not be a good idea.

Escrow is all money the mortgage company adds to your monthly mortgage payment so that they can pay your insurance bill and they can pay your tax bill, and they can pay your PMI. Most people think that, other than refinancing, the only way to lower your monthly mortgage payment is by reducing the escrow.

Now that my principal balance was less than 80%, I had built up equity. My home had also gained in value. In one year, the FMV appraisal of it went from $105k to $115k. I still owed about $78k.

The result of recasting the mortgage: My monthly mortgage payment dropped to $585.

Now, this may seem to be nothing but good, but there is a downside, and you need to figure out if recasting is right for you. The downside is that recasting is based on the original date of your last mortgage payment. If your mortgage is scheduled to be paid off in the year 2032, as mine was, they reamortize the entire loan based on it. I believe that in my situation, by working very hard and paying a bit more to the prinicipal every month, I had been able to get my mortgage down to where I would have the mortgage paid off in the year 2019 if I continued to pay about $700 per month.

I made a conscious decision, BASED ON UNDERSTANDING AMORTIZATION, that I would recast, bring down my MONTHLY MORTGAGE PAYMENT OBLIGATION , enjoy the lower payments during months when I had to, but continue to pay principal in advance when it was possible.

The first several months, I was still employed. I was able to pay off a couple of thousand dollars in additional principal. This enabled me to get back on track in terms of when my mortgage would end. It is going to end many, many years before the year 2032.

At first, when I contacted my mortgage company, I couldnít find anyone that even heard of recasting. I finally got ahold of someone who knew of it. Finally, I found someone who had heard of recasting, but only in terms of people doing it as a result of not being able to meet their existing monthly mortgage obligations. I finally talked with the correct person at the mortgage company, and she was aware of how recasting was an option anyone could use. I told her exactly what I wanted to do, and had all the figures.

She calculated what my monthly payments would be, using the mortgage companies computer program. The projected amortization schedules that I had run were two cents different than what her program calculated.

I emphasize the importance of understanding how your mortgage is amortized. The spreadhseets I have built allow me to track my mortgage payments closely, know the effect of paying an additional amount of principal per month, and project the effects of recasting or refinancing or insurance premium or tax increases. It only takes a few minutes, once a month to update it. I even have it plan what monthly principal prepayments I need in order to ensure I am paying as much to my principal as I am to the interest. Every homeowner should be aware of every penny they spend on their mortgage.

The other good thing about recasting, rather than refinancing, is that your mortgage is not rewritten, at your expense, which is often costly. If your interest rate was good, and your terms were good, there is no need to rewrite the mortgage and go through all that expense. I got my mortgage when a fixed 30 year was between 5 and 6%, and Iím satisfied with the rate.The rule of thumb is that if your interest rate is more than a point or two higher than current rates, consider refinancing rather than recasting, and make sure you understand closing costs.

As of now, I am still unemployed, but at least my monthly mortgage obligation is 22.5% less, as a result of paying off principal in advance when I was gainfully employed, getting rid of PMI, recasting to lower the monthly payment, and having a great amortization spreadsheet that is easy to use. My paymenst are still years ahead of schedule, because I continued to prepay principal for several months while I was still employed. In fact, banks and mortgage companies should probably consider hiring me, because I can tell you right now, most of their employees have no idea what recasting is and how it can be used as part of sound financial planning for their customers.

Happy Amortizing,

Thatís all for meow,

Housecat

Contact Housecat to Comment on this Article. Housecat is an independent syndicated columnist. See Housecat at Realty Home , other sites which feature Housecat, and at the Housecat web site.

 

This column and any others which appear on Housecat are copyright 2005, AeroScore, Inc. They may only be downloaded and republished by Housecat members. See benefits. Violators will have their eyes scratched out and the curse of 1000 fleas shall infest their flesh, in addition to other more civil penalties.

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