In the current rising interest rate environment, our clients are asking about the benefits of paying more each month on their mortgage as well as what it means to “recast” the loan. Will your overall financial picture be improved by reducing your mortgage principal or your monthly mortgage payments? Let’s dive into the pros and cons of both:
Paying additional principal on your mortgage
Making extra monthly or annual mortgage payments is an effective way to pay off your loan faster. Each additional dollar (over the monthly minimum) can go directly to paying down the loan principal, but please confirm that with servicing first. This approach may save you money by reducing the amount of interest payments over the life of a loan.
EXAMPLE: If you pay one extra mortgage payment per year, you will pay off the loan ~5 years earlier than the original 30-year term.
When rates were ultra-low, this option was not very popular. Many individuals preferred to put additional funds into other investments, betting that the return on that investment would beat out the 2.5% rate they were paying on their mortgage. However, with rates pushing up and the stock market trending down, adding extra to pay down the mortgage makes more financial sense.
Recasting your mortgage
Recasting is not a well-known option but can work great for some. With a loan recast, the borrower decides to pay off a significant chunk of the mortgage. After the principal reduction is made, the loan servicer calculates the NEW monthly payment based upon the new principal balance and how much time is left on the original loan term. This would reduce your minimum monthly mortgage payment.
EXAMPLE: If you have 25 years remaining on your loan, you can pay down $50k, recast, reduce your monthly payment, and still pay off the loan in 25 years (vs. restarting at 30 years with a refinance).
This approach is growing in popularity due to its low cost ($150-$250 depending on the loan servicer) and the ability to retain the same interest rate as the original loan terms. After all, no one wants to trade 4% for 6%.
If you would like to learn more about the potential savings utilizing either of these loan strategies, reach out to learn more from any of our Loan Officers.
Planet Boulder Loan Consultants are available to speak about a variety of loan products that may meet your needs.