How Making Lump Sum Payments Can Affect Your Mortgage in Washington

December 20, 2020
Last updated:
September 21, 2021
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A mortgage typically involves making regular installment payments towards paying off the entire loan amount, plus interest. These payment amounts are established when you first take out the mortgage, and payments must be made on time.

But from time to time, you may come upon a lump sum of cash that you may want to put towards paying down the principal portion of your mortgage loan. But there are some things you should understand before making an additional lump sum payment on your mortgage in Washington.

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Whether you come upon that money after receiving a bonus from work, from a side gig, or even from winnings, you may wonder how to use that extra cash.

While you could use that money to spend on a myriad of things, you might be considering paying down part of your mortgage balance, which would be a great idea. But prior to making this decision, it’s important to be familiar with the impact that a lump sum payment could have on your home loan, known as “mortgage recasting.”

Mortgage Recasting: Defined

Mortgage recasting is a term that refers to a lump sum payment that is made towards our mortgage. Also known as “reamortization,” mortgage recasting your home loan means that the lump sum payment you make goes towards the principal portion, and not the interest portion.

Your lender will reamortize your mortgage after receiving your lump sum payment, which reduces your loan balance, leaving you with a new balance. That means your monthly mortgage payments will effectively be reduced, and the total amount of interest you pay over the life of the mortgage will also be reduced.

Having said that, recasting your mortgage doesn’t change the actual rate you pay on your mortgage in WA, nor the terms of your home loan.

Making a lump sum payment on your mortgage makes most sense when you have a mortgage interest rate that remains fixed. If the rate is high, mortgage recasting is not recommended.

Eligibility And Availability of Mortgage Recasting

Before you decide to use an extra lump sum of money to be put towards your mortgage principal, you’ll first need to verify whether or not your lender offers mortgage recasting. Further, not all home loans qualify for mortgage recasting. For example, FHA and VA loans are not eligible for recasting.

That said, mortgages such as conventional loans, jumbo loans, high-balance loans, home equity loans, and HELOCs can typically be recast. As such, it’s important that you do some homework first.

If your mortgage is eligible for recasting and your lender allows it, the next step would be to let your loan servicers know of your intention to make a lump sum payment on your mortgage in Washington.

What’s the Difference Between Mortgage Recasting and Refinancing?

You may think that there are some similarities between mortgage recasting and refinancing in Washington that would make distinguishing the two difficult. But they are different.

Mortgage recasting only requires one lump sum of money to reduce the overall loan balance and monthly payments. The interest rate does not change as it would with a refinance. If your interest rate is already low, there would be little point in refinancing.

On the other hand, refinancing involves reapplying for a completely new mortgage and paying all the fees associated with a new loan, including appraisal fees, closing costs, and so forth. The existing loan is paid off in full by the new loan.

Refinancing is usually recommended if much lower interest rates are currently available compared to your loan’s high interest rate. By refinancing to a lower rate, you could save quite a bit of money over the life of your loan.

But if you already have a fixed-rate home loan with a low rate, then a refinance doesn’t make much sense. Instead, a recast might be the way to go if you have a low-interest, fixed-rate mortgage and want to lower your monthly payments.

Reduction of Your Loan’s Principal Balance

A mortgage recast in Washington is attractive to borrowers because of the ability to reduce the loan amount and monthly payments and because of how easy and cost-effective it is to do.

Upon recasting your mortgage, you’ll quickly notice that your outstanding loan balance will be lower. In turn, your monthly payments will be lower.

And while your monthly payments will still be applied both to the principal and interest portions of your mortgage, the lump sum payment will be put entirely towards the principal portion. As such, this will have a positive effect on the equity in your Washington home.

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More Effective Mortgage Payments

When you recast your mortgage by making a lump sum payment towards your mortgage, the interest charges for every month will be adjusted. Interest is calculated based on your loan balance. But when you reduce the balance through a lump sum payment and a recasting of your mortgage, your interest will now be calculated based on the current balance.

At the end of the day, reducing your outstanding balance simultaneously reduces the interest charges, which means all mortgage payments going forward are more effective at reducing your overall mortgage debt and lowering the interest amount you will pay over the life of the mortgage.

Final Loan Payment Date Changes

Reducing the overall loan amount means the final loan payment date can arrive sooner. Depending on how much of a lump sum payment you make, you can shorten the life of your mortgage by as little as a month or two to as much as a few years.

When Should You Consider a Mortgage Recast in Washington?

There are certain situations in which recasting your mortgage makes the most sense:

  • You came upon a large sum of money
  • You want to lower your overall loan balance
  • You want to reduce your monthly mortgage payments
  • You don’t want to create a new mortgage with a refinance
  • You already have a fixed-rate mortgage at a low interest rate

Making a lump sum payment towards your mortgage can be very beneficial for you. However, mortgage recasting is not the only option available. Take the time to compare the benefits of recasting your mortgage to the benefits of other options — such as mortgage refinancing — before deciding the best course of action to take. And be sure to speak with a mortgage professional to help you make this important decision.

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Let Sammamish Mortgage Help You With Your Mortgage Recast

Sammamish Mortgage has helped many home buyers in the Pacific Northwest since 1992. If you are looking for mortgage financing in Washington State, we can help you get preapproved. Sammamish Mortgage offers mortgage programs in Colorado, Idaho, Oregon and Washington.

Contact a loan officer if you have any mortgage-related questions or concerns. If you are ready to move forward, you can view rates, obtain a customized instant rate quote, or apply instantly directly from our website.

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