If you’ve been good about saving extra money every month and find yourself sitting on a pile of cash, should you make an extra large mortgage payment? The short answer is: you can, but it won’t lower your monthly payments unless you recast your mortgage. It will still reduce the overall amount you owe on the loan and, therefore, reduce the amount of interest it will accrue over the next month
What is mortgage recasting?
Mortgage recasting is when a lender adjusts the payment amount and schedule of the loan to reflect the current lower balance on the loan. This is referred to as re-amortization. Let’s use a real-life example.
Let’s say you bought a house for the current median home price in Boise, Idaho: $536,000 (as of 10/7/2020) on a 30-year loan with a 3% interest rate. This means your monthly payments are $2,260.
After 5 years of paying the $2,260, your mortgage balance will be $400,400. Say you’ve been able to save $1,000 per month over these 5 years, meaning you have $60,000 saved up, and you want to put this toward a massive mortgage payment. This will make your remaining loan balance $340,400. Without recasting your mortgage, next month you will still have to pay $2,260 to the bank. However, it will mean you will pay off your mortgage sooner.
If you have your mortgage recasted after this massive payment, your payments will be lower for the remaining 25 years of the loan. With the new amortization schedule, your new monthly payments will be $1,614 per month, saving you $646 every month!
On top of that, it may make sense to refinance your mortgage as well if interest rates have improved. Speak to your lender about if this option makes sense for your situation.
Two things to keep in mind.
- Ask your lender if they will recast your loan before making a large payment. If you have a loan that is not backed by the government (FHA, USDA, VA, or most jumbo loans), your loan cannot be recast. Government-backed loans through Fannie Mae and Freddie Mac can be recast.
- Unless you plan to live in your home long enough to pay off the mortgage, it may not make as much sense to re-amortize the loan. The average homeowner stays in their home for 13 years now, according to the National Association of Realtors. In the same report, Boise homeowners tend to live in their homes for around 8 years. Keep your long-term goals in mind when deciding to recast your mortgage.
The Boise market is one of the hottest and fastest-growing in the nation. If you want to take advantage of low interest rates and buy a home, browse our listings and call a Build Idaho agent to get started.