I got into dispute with our real estate agent as she stated that banks do not re-amortize loans. We are next to becoming capable of making significant additional principal payments. I contacted my mortgagor, countrywide loans, and inquired about possible loan re-amortization following such principal installments. I was explained that they do "re-capping" upon request and this costs $250 per transaction. They suggested to accumulate a lump sum in a bank account and then make a onetime pre-payment to achieve the best "value" for those $250.

My question is simple - why banks do not re-amortize loan automatically? I understand that they make more money having interest fees upfront and that they are not willing to re-amortize. But this sounds so unfair that I am suspicious there's a law against such practices. Otherwise, bank has about 5 different payment options with nominal fees attached, like bi-weekly, weekly, etc. what would be the right course of action? $348,000 30yr fixed mortgage at 5.85%, in 6 months we are capable of easily dropping maybe 1,500-2,000 a month in extra payments.

I.
Kent
Washington

Answer:

I., I assume you have a 30-year fixed mortgage? It is standard practice for lenders to not re-amortize a fixed rate mortgage. That is one of the fundamental differences between a fixed rate mortgage and a variable or adjustable rate mortgage. Lenders sell loans in bulk on the secondary market, just like bonds. A loan that it guaranteed to return a certain interest rate over a fixed period is one type of security, and that is what your mortgage is.

If you plan to make additional principal payments over the next few years, I think you should look at an interest-only ARM. Many ARM product recast several times over the first five or ten years. If you have over 5% equity and intend to live in the house for the next seven or so years at least, and want to make large principal payments, you might look at the Option ARM. In may opinion, you get the most bang for your buck when paying down principal because the Option ARM recasts more frequently.

Rick Lanicek
PrimeLending, A PlainsCapital Company
17950 Preston Rd Ste 50
Dallas, TX 75252-5759
(972) 705-9721
(800) 256-0817 Ext 202
Mobile (214) 552-6125
eFax (972) 692-7260