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If you have recently come into a little extra money, you might be considering making a lump sum payment on your mortgage. If so, there are a few things you should know about recasting before you make an additional payment on your loan.
Periodically, many homeowners will receive a rather sizable amount of extra cash. This may be from a bonus from your employer, a refund on your tax return, a financial gift from a relative, or something else altogether.
While there are many things that you could do with your windfall, you may be wondering if paying down your mortgage balance is a wise idea. Before you make your decision about how to spend your money, consider what impact your lump sum payment will have on your mortgage.
A lump sum payment on your mortgage is also referred to as mortgage recasting or reamortization. Thus, when you opt to recast your loan, you are making a lump sum payment toward your mortgage’s principal balance. Upon receipt of your additional payment, your lender will reamortizes your mortgage loan, effectively reducing your loan to reflect a new balance.
Overall, making a lump sum payment or recasting cuts your monthly payments and the amount of interest you will pay over the life of the loan. That said, it does not change your interest rate or the terms of your loan. Note that making a lump sum payment is beneficial when you have a low-interest rate that will stay the same. In other words, if your interest rate is high, recasting is ill-advised.
Before you get excited about lower payments, you need to make sure your lender offers loan recasting – some do not. Moreover, not all mortgages qualify for recasting. For instance, FHA loans and VA loans cannot be recast. However, conventional, high-balance, jumbo loans, home equity loans, and HELOCs generally can all be recast. Thus, it is imperative that you do your research first. If you can recast your mortgage loan, then the next step is to notify your loan servicers, followed by making a lump sum payment.
Clearly, recasting is easier than refinancing because it requires only a lump sum of money in exchange for lower monthly payments. However, when you opt to recast a loan, your interest rate does not change or become lower like it might with refinancing. Moreover, in the event that your interest rate is low, refinancing could have a negative effect.
In contrast, refinancing means applying for a brand-new loan and paying all the fees (closing fees, appraisal costs, etc.) that go with it. With a Refi, your existing loan is paid in full by the new mortgage, which hopefully has a lower interest rate.
Of course, if you already have a fixed-rate mortgage with a low-interest rate, then a Refi is usually not the best choice. That said, if you have a low-interest, 30-year fixed-rate mortgage and want lower monthly payments, then recasting is the way to go.
Recasting has some appeal because it is fairly easy to do and a relatively inexpensive way to lower monthly payments.
The most obvious impact a lump sum payment will have on your mortgage is an immediate reduction in your outstanding principal balance. Your regular monthly payments will be applied to both interest and principal, but your lump sum payment will be entirely applied to the principal. Therefore, you can expect to see a rather sizable reduction in the outstanding balance, and this will have a direct and positive impact on your home equity.
Your required monthly mortgage payments will not be lowered when you make a lump sum payment on your mortgage or recast a loan, and you will still be required to pay the same amount to your lender going forward. However, your interest charges for each month will be adjusted. Your interest will be calculated based on the current loan balance each month. A reduction in outstanding balance lowers the interest charges. This essentially makes your future payments more effective at debt reduction and reduces the amount of interest you will pay over the life of your loan.
Because each of your loan payments going forward will be more heavily weighted on principal reduction than on interest charges, the fact is that your final loan payment date can be accelerated. Depending on the amount of the lump sum payment that you make toward your mortgage, this may be an acceleration of a single month, several months, or even several years in some cases.
Ultimately, there are a few instances where opting for recasting or making a lump sum payment on your mortgage makes sense. As briefly mentioned, if you receive a windfall of sorts, then why not make managing your monthly mortgage payments easier? Alternatively, if you have purchased a new house before selling your old one, then you can apply the proceeds for selling to your new mortgage without having to refinance. Finally, speaking of refinancing, when a Refi loan just is not in the cards, then that is a great time to consider what your recasting options are.
That said, at the end of the day, making a lump sum payment on your mortgage or recasting can have many positive effects for you. However, this is not the only option available when deciding how to spend or invest your windfall. Compare these benefits against the benefits of other options available to determine your best course of action. You may also speak with a mortgage professional for personal guidance and assistance.
Do you have questions about home loans? Are you ready to apply for a mortgage to buy a home? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington, serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.
If you’ve recently come into a large sum of money, and would like to lower your mortgage payment while saving a significant sum on interest, recasting a loan could be the right move for you.