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If you have recently received extra money, you might consider paying your mortgage principal. If so, this article covers the pros and cons of what you should know about recasting a mortgage.
Occasionally, homeowners will receive a rather sizable amount of extra cash. This cash may be from a bonus from your employer, a tax return refund, a relative’s financial gift, or the sale of a previous home.
While there could be many things that you could do with this money, you may be considering if making a sizeable payment to your mortgage balance is a wise idea. Let’s consider what impact your lump sum payment will have on your mortgage before deciding to spend your money.
What Is Mortgage Recasting?
A principal payment or large lump sum payment on your mortgage is known as mortgage recasting or re-amortizing. Thus, when you recast your loan, you make a large payment towards your mortgage’s principal balance. Your mortgage lender will re-amortize your mortgage loan, effectively reducing your loan balance and monthly payment.
Therefore, making a payment towards the principal or recasting reduces your monthly payment and the interest you would have paid over the life of the loan. That being said, it does not change your interest rate or the terms of your loan. Note that a lump sum payment is beneficial when you have a low-interest rate that will stay the same. In other words, recasting your loan if you have a high-interest rate is not advised, and refinancing is.
Mortgage Recasting Criteria
Make sure your lender offers to recast – as some lenders do not. Moreover, not all mortgages qualify for recasting such as FHA loans and VA loans are not eligible for recasting. However, conventional and jumbo loans can generally be recast.
Therefore, you must do your research first by contacting your lender. Here are some questions to ask:
- Do you offer recasting?
- What is the fee for recast my mortgage?
- What is the minimum amount that can be recast?
- How long does the recasting process take?
If you can recast your mortgage loan, the next step is to notify your loan servicer of the recast and the lump sum payment amount.
Mortgage Recasting Vs. Refinancing
Recasting is cheaper than refinancing because it requires only a lump sum of money to lower your monthly payments. However, when you recast a loan, your mortgage rate does not change or becomes lower as it might with refinancing. Moreover, refinancing would have a negative financial effect if you have a low interest rate.
In contrast, refinancing a mortgage means applying for a new loan and paying for closing costs (closing fees, appraisal costs, etc.) that come with it. With a refinance, the new mortgage pays your present loan in full, which should have a better interest rate.
Of course, if you already have a low-interest fixed-rate mortgage, then a refinance is not the best choice. Recasting is the way to go if you have a low-interest, 30-year fixed-rate mortgage and want lower monthly payments.
Reduction in Principal Balance
Recasting is appealing because it is reasonably easy to do and a relatively inexpensive way to lower monthly payments.
A lump sum payment’s most apparent impact on your present mortgage is an immediate reduction in your principal loan balance. Typically, your regular monthly payments will be applied to both interest and principal, but your lump sum payment will go straight to the principal. Therefore, you can expect a rather sizable reduction in the outstanding balance, which will directly and positively impact your home equity.
Principal Payment versus Recasting
Your required monthly mortgage payments will not change when you make a lump sum payment on your mortgage without recasting the loan. You will continue to make the same payment amount to your lender in the future.
However, it will adjust your interest charges monthly, and the interest will be calculated based on the new loan balance each month. Meaning a reduction in the outstanding balance lowers the interest charges. Reducing the interest, you pay essentially makes your monthly payments more effective by reducing the amount of interest you pay over the term of your loan.
A Principal Payment Shortens the Term of the Loan
Because your loan payments will apply more to principal each month than on interest charges, it will accelerate the loan term. Depending on the lump sum payment you made towards your mortgage, could accelerate the loan by months to several years.
When You Should Consider A Recast
There are several instances where recasting or making a lump sum payment on your mortgage makes sense. As briefly mentioned, why not make managing your monthly mortgage payments easier if you receive a windfall? Alternatively, if you purchased a new house before selling your present one, you can apply these proceeds to your new mortgage without having to refinance. Finally, when refinancing a loan is not in the cards, then that is a great time to consider your recasting options.
Whether you are making a lump sum payment on your mortgage or recasting, you are making a positive change that can save you money. However, options are available when deciding how to spend or invest your windfall. Compare these benefits to determine your best financial course of action. You may also speak with one of our mortgage professionals for personal guidance and assistance.
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