by Christy Bieber | Published on Aug. 4, 2021
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Want a lower monthly mortgage bill? This is one way to get one.
A lower monthly mortgage payment may seem like a very attractive proposition since it will free up some wiggle room in your budget. However, you can't just reduce your monthly payment. You made a commitment to a lender and must keep to your loan terms.
Refinancing can be a good way to reduce your payment -- if you're able to qualify for a new loan at a lower interest rate than you're currently paying.
But securing a new home loan isn't necessarily the only way to reduce monthly mortgage costs. There's another option as well: You could recast your mortgage.
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Recasting your mortgage, or reamortizing your mortgage, involves making a lump sum principal payment on your home loan to pay down part of the balance. Then, you'll ask the bank to create a new amortization schedule based on the lower principal balance that's left.
Say, for example, you owe $300,000 on your home loan. If you want to recast your mortgage, you'd first need to make a lump sum payment. Many lenders require at least a $10,000 payment in order to be eligible. Once you make your lump sum payment, you'll ask your lender to reamortize your loan. That means lenders will redo your payment schedule.
See, your monthly payments are based on the interest due, as well as the amount of the principal you need to pay each month in order to fully repay your loan by the due date. If you make a lump sum payment, you'll reduce your outstanding loan balance. As a result of that principal reduction, you won't need to pay as much principal and interest each month in order to pay off your loan on schedule.
If you simply make a lump sum payment, your monthly payments won't just automatically change because of it; you'll continue to owe the same amount. In that case, you would just end up paying off your loan a little earlier due to the lump sum you sent in.
However, you may have the option to have your monthly payments changed simply by asking your lender to recast your loan. If your lender allows this, they'll recalculate a new monthly payment based on your new lower principal balance, thus reducing the amount you owe each month.
You will pay a small fee for this service -- usually around $250 -- but will get to enjoy those lower payments for the remainder of the time you're paying off your loan.
Recasting your mortgage will not lower your interest rate, unlike when you refinance. You also won't change your repayment timeline. If you had 20 years left on your loan, you still will after recasting.
But it can be a good option if you receive a financial windfall and you want to use it to lower the amount you pay on your home loan each month.
You won't have to pay closing costs for recasting as you would with refinancing, and the lower monthly mortgage payments that result could give you more wiggle room each month for the remainder of your payoff period.
You should think carefully about whether this approach makes sense for you or whether a refinance might be a better approach to reduce what you owe your mortgage lender each month.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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