How Does Making Lump Sum Payments Impact Your Colorado Mortgage?

January 20, 2021
Last updated:
September 24, 2021
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How does reducing your Colorado mortgage loan amount sound to you?

Of course, with every mortgage payment you make, you’re effectively reducing your mortgage loan amount bit by bit until it’s eventually paid off entirely. But you may be able to put extra money towards your mortgage balance in addition to your regular mortgage payments.

If you come upon a lump sum of money at some point, you may want to consider “recasting” your home loan in Colorado.

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Ideally, your mortgage payments fit well within your budget. When you first take out a home loan, your lender will assess your finances to make sure you are capable of covering your mortgage payments every month. But every once in a while, you may find that you are able to afford more than your regular mortgage payment amounts.

Any large sum of money that you come across — whether through a raise at work, an inheritance, or lottery winnings — may be used to pay down a portion of your mortgage principal.

There are several ways that you can spend that extra money, but perhaps paying down part of your outstanding loan balance would be a good idea. So, how exactly does mortgage recasting work to help reduce your Colorado mortgage?

What is Mortgage Recasting?

Mortgage recasting involves making a lump sum payment towards your mortgage. More importantly, your cash contribution would be put exclusively towards the principal portion of the mortgage, and not the interest portion.

This is important, as reducing your principal amount will effectively lower the total amount you will end up paying in interest. As such, you can save a lot of money over the course of your home loan.

Also referred to as “reamortization,” mortgage recasting will result in your mortgage being reamortized. When your loan balance is reduced, so will your monthly mortgage payments.

It’s important to note that mortgage recasting does not result in a change in interest rate. The rate stipulated in your mortgage contract remains intact, as will your mortgage terms.

Mortgage recasting makes most sense when your interest rate is fixed and comparatively low. If your mortgage interest rate is high, on the other hand, recasting your mortgage is not suggested. Instead, a refinance might make more sense.

Eligibility And Availability of Mortgage Recasting

Before you have your mortgage recast, you’ll first need to find out if this arrangement is available through your lender. You will also need to verify whether or not recasting is available for the specific type of mortgage you currently hold.

Certain types of mortgages — including FHA and VA loans — are not eligible for mortgage recasting. But it may be available for other home loan types, including:

  • Conventional home loans
  • High-balance mortgages
  • Jumbo loans
  • Home equity loans
  • Home equity lines of credit (HELOCs)

If your mortgage qualifies for mortgage recasting and your lender allows it, the next step is to let your loan servicer know of your intentions to make a lump sum payment towards your mortgage in Colorado.

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How Do Mortgage Recasting and Refinancing Differ?

There may be some confusion between mortgage recasting and refinancing. However, they are not the same.

As mentioned earlier, mortgage recasting involves making a lump sum contribution to your mortgage to reduce your outstanding balance. No changes are made to the mortgage interest rate nor the mortgage terms.

On the other hand, refinancing involves a completely new interest rate. More specifically, a totally new mortgage would be taken out to replace the old mortgage. That means the new mortgage would also have new terms in addition to a new rate.

Refinancing is an attractive option if the goal is to reduce the interest rate, which would also help you save money over the life of your loan. If your interest rate is very high, you’re spending a lot of extra money on the interest portion of your mortgage.

When rates drop, you could refinance your mortgage and lock in a lower rate. By refinancing at a lower interest rate, your overall loan amount will be reduced because you’ll owe a lot less in interest.

Refinancing doesn’t affect your principal, but it does affect the interest rate. As such, your mortgage will end up being a lot cheaper. But if the interest rate on your mortgage is already low, a mortgage recast might make more sense.

Lowering the Principal Balance

Mortgage recasting may be a good option for homeowners in Colorado, as it offers the chance to reduce your monthly mortgage payments as well as your overall mortgage balance. And the simplicity of mortgage recasting makes it even more attractive.

Your home’s equity will be positively affected because the lump sum payment you make will go exclusively towards the principal portion of your mortgage. Mortgage recasting offers an excellent way to immediately increase the equity in your home.

Changes in the Last Loan Payment Date

By reducing your overall mortgage amount, your last loan payment date will come sooner rather than later. You can shorten the life of your mortgage by as little as a few months to as long as a few years, depending on the amount of the lump sum that you make towards your mortgage.

When Should You Consider a Mortgage Recast in Colorado?

A mortgage recast is better suited for certain scenarios, including the following:

  • You came across a large sum of money that you’re free to spend as you please
  • You’re looking to reduce your monthly mortgage payments and home loan balance
  • You don’t want to create a new mortgage through refinancing
  • You have a fixed-rate mortgage and a low interest rate

Mortgage recasting can help you reduce your mortgage balance and monthly payments, but there are other options available. Take the time to weigh the pros and cons of both recasting and refinancing, as well as other options available to you. And as always, chat with a mortgage expert to help you make the right decision!

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Sammamish Mortgage Can Help With Mortgage Recasting in Colorado

Sammamish Mortgage has helped many home buyers in the Pacific Northwest since 1992. If you are looking for mortgage financing in Oregon, we can help. 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 with mortgage financing, you can view rates, obtain a customized instant rate quote, or apply instantly directly from our website.

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