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.
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 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.
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.
Before moving forward with a mortgage recast, borrowers should ask whether any administrative fee applies and whether the lender requires a minimum lump-sum payment. These requirements can vary by lender and loan type, so it is important to confirm the details in advance. Understanding the cost to recast and the minimum amount needed can help you decide whether this option makes sense for your situation.
The mortgage recast process generally starts with confirming that your loan is eligible and that your lender or loan servicer offers recasting. From there, you would notify the servicer of your intent to make a lump-sum principal payment and request that the loan be reamortized. After the payment is applied, the lender servicing team updates the loan balance and recalculates the monthly payment based on the remaining term.
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.
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.
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.
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.
It is important to understand how recasting compares with simply making an extra principal payment. With a recast, the loan is reamortized after the lump-sum payment, which generally lowers the required monthly payment while keeping the original loan term in place. By contrast, a principal prepayment without recasting may leave the monthly payment unchanged, which can help pay the loan off sooner instead of recalculating the payment amount.
Using a lump sum for mortgage recasting can offer benefits, but it also involves tradeoffs. Once the funds are applied to the mortgage principal, that money is no longer as readily available for other needs, goals, or emergencies. Borrowers should also consider whether lowering monthly payments is their main objective or whether they may prefer to keep more cash on hand and evaluate other options before committing a large sum to the loan.
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.
Sammamish Mortgage has helped many home buyers in the Pacific Northwest since 1992. If you are looking for mortgage financing in Washington State, Colorado, Idaho, Oregon, or California, we can help you get pre-approved. Sammamish Mortgage offers multiple mortgage programs with flexible qualification criteria to borrowers across the Pacific Northwest, including our Diamond Homebuyer Program, Cash Buyer Program, and Bridge Loans. Visit our website to get an instant rate quote or to use our online mortgage calculator. Or, contact us if you’re ready to get pre-approved for a mortgage.
A mortgage recast is when a borrower makes a large lump-sum payment toward the principal balance of a mortgage and the lender recalculates the monthly payment based on the lower balance. The interest rate and most original loan terms usually stay the same.
Mortgage recasting lowers the monthly payment by reducing the principal balance with a lump-sum payment, while keeping the existing loan in place. Refinancing replaces the current mortgage with a new loan, which can change the rate, term, and closing costs.
Yes. After the lender reamortizes the loan using the reduced principal balance, the required monthly payment is typically lower.
No. A mortgage recast generally does not change the interest rate. It changes the payment amount because the loan balance is lower.
Conventional loans, jumbo loans, high-balance loans, home equity loans, and HELOCs may be eligible for recasting, depending on the lender. Eligibility varies by loan type and servicer.
FHA and VA loans are generally not eligible for mortgage recasting.
Yes. Not all lenders or loan servicers offer recasting, so the borrower must confirm that the mortgage is eligible and follow the lender’s recast process.
A mortgage recast can reduce the outstanding principal balance, lower monthly payments, reduce total interest paid over time, and improve payment efficiency without replacing the existing mortgage.
A mortgage recast may make sense when a borrower receives a large lump sum, wants lower monthly payments, already has a low fixed interest rate, and does not want to refinance into a new loan.
It can, depending on the size of the lump-sum payment and how the loan is reamortized. Reducing the principal balance may shorten the payoff timeline in some cases.
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