It was recently brought to my attention that the Extra Payment Mortgage Calculator did not apply to some borrowers because ... are you ready for this ...
Instead, mortgage lenders sometimes offer to recast the borrower's mortgage, but the borrower needs to make a large principal payment in order to qualify for the recast.
Now, I don't know the exact wording of the fine print included in the mortgage papers these borrowers have signed, but I can only assume the fine print read something like this:
If that's true, does it sound like the mortgage lender genuinely cares about their customers?
Not to me, it doesn't.
So the next question you might be asking is, what the heck do lenders mean when they tell borrowers they can recast their mortgage?
Based on my understanding of the term, recasting (also referred to as, re-amortization) is the lender saying to the borrower, "No, I won't let you pay off your loan early or reduce your interest rate, but I will let you lower your monthly payment if you make a minimum, one-time principal reduction ... for a fee."
In other words, recasting your mortgage will reduce the balance you owe, but since recasts typically don't include a shortening of the term or a lower interest rate, the net effect is simply a lower monthly mortgage payment.
Of course, since your monthly mortgage payment is reduced while everything else stays the same, this does result in interest savings. However, it's usually less than the level of savings you could achieve if all of your extra, lump sum, and overpayments were applied to principal reduction at the time they are made.
The following example is based on a current balance of $100,000, a monthly payment of $1,073.65, and a 5% interest rate (all results are rounded to nearest dollar). From this example you can get a good idea of the savings difference between a mortgage recast and what would happen if your mortgage lender would reduce your principal while keeping the same amortization schedule (Optimal terms).
In the above example, making a lump sum principal reduction while continuing to make the original payment amount would save $3,585 more in interest charges than recasting, and you would pay off your mortgage 15 months sooner.
First, as I've stated in numerous places throughout this site, if you have higher interest debt and/or you don't have 3-6 months of income saved up in an emergency fund, you would likely benefit more from using any lump sum of cash for paying down high interest debt and building an emergency fund instead of paying down a mortgage balance (mortgages usually have the lowest interest rates, plus the interest payments may be tax deductible).
Secondly, if your mortgage lender allows principal prepayments and credits them to your balance as they are made, and you can continue to make the original monthly payment amount, you would save more money just prepaying your principal instead of doing a formal recast.
On the other hand, if you have a fully funded emergency fund and no higher interest debt to pay off, and your lender won't credit principal prepayments as they are made, then recasting your mortgage might be a good idea -- especially in cases where refinancing is either not an option or doesn't offer any significant savings.
Here are a few things to keep in mind if you're considering checking into a re-amortization to lower your payment:
With that, let's use the Mortgage Recasting Calculator to calculate how much your re-amortized payment will be and how much it might save you over the remainder of the payoff term.
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Current principal balance: Enter the dollar amount of the current payoff amount of your mortgage (principal owed). If you are not sure, call your mortgage lender and ask for the current payoff amount.
Annual interest rate: Enter the annual percentage rate (APR) you are being charged on your mortgage.
Current monthly principal and interest mortgage payment: Enter your current monthly principal and interest payment (do not include amounts your are paying for taxes and insurance).
Month and year of next mortgage payment: Select the month and year that your next mortgage payment is due.
Lump sum reduction in principal: Enter the lump sum amount that you will be using to pay down your principal balance for the mortgage recasting (not including the recasting fee).
Recasting fee: Enter the dollar amount of the fee your mortgage lender will be charging you to recast the mortgage.
Number of payments remaining: Based on your entries, this is the number of mortgage payments you still need to make in order to pay off your mortgage. If this number is substantially different from the actual number, please check to make sure you entered the correct current payoff amount and/or interest rate. Note that this number stays the same for recasting.
Recast loan balance: Based on your entries, this is how much you will still owe (principal balance) on your home loan after deducting the lump sum recasting payment.
Existing terms row: This row shows your current monthly mortgage payment amount, plus the total interest you will end up paying between now and when the mortgage is paid off.
Recast terms row: This row shows the recast monthly payment amount, plus the total interest and recasting fee costs you will pay between now and when the recast mortgage is paid off.
Recast savings row: This row shows the monthly payment savings from recasting, plus the total cost savings between now and when you pay off the recast mortgage.