When you divvy up your monthly budget pie, housing is very likely the biggest slice, especially after you add in utilities, maintenance and of course, your mortgage.
So wouldn’t it be great if you could lower your mortgage payments without refinancing your loan? Or better yet, pay off your mortgage ahead of schedule?
Either one could be doable if you have extra cash. Prepayment and recasting offer two very different ways for managing mortgage costs. Here’s how they compare:
What’s Mortgage Prepayment?
Prepaying a mortgage means making extra payments on top of your regular monthly payment. You can pay extra weekly, biweekly, monthly, annually — whatever fits your budget best.
Prepayment Advantages
Prepayments are applied to your loan principal. Since your monthly interest payments are based on your current loan balance, prepaying reduces future interest payments. You’ll pay less interest overall if you make extra payments toward the principle.
Mortgage prepayment shortens the loan term, allowing you to become mortgage debt-free faster.
Prepayment Disadvantages
Prepayment may be sounding pretty good but there are a couple of potential downsides to keep in mind.
First, some lenders charge a prepayment penalty when you pay your loan off early. The penalty may be a percentage of the original mortgage loan or a certain number of payments. That can add up quickly, so it’s important to read the fine print on your mortgage regarding prepayment. Ask your lender whether your loan has a prepayment penalty or a cap on the amount you can prepay each year.
Second, mortgage prepayment can affect your tax filing. Home mortgage interest is tax-deductible and prepayment can shrink the size of your deduction if you’re paying less in interest. That’s important to know if you count on the mortgage interest deduction to lower your tax bill.
What’s Mortgage Recasting?
Mortgage recasting is a lesser-known way to manage your mortgage.
Recasting is sometimes referred to as re-amortization. Instead of paying extra on your mortgage each month, you make one larger lump sum payment against the principal balance and ask your lender to reset the monthly payments. The end result is a lower monthly payment.
Two things to know about recasting: it doesn’t change your interest rate and your loan term stays the same. You’d pay less in interest overall but you wouldn’t pay off your loan any earlier.
Recasting Advantages
The biggest benefit of recasting is the lower monthly payment. A lower payment can be easier on your budget. The lower payment might free up cash that you can use for other financial goals, such as paying off other debts or saving for retirement.
Compared to mortgage refinancing, which involves replacing your old home loan with a new one, recasting may be an easier process. There’s no credit check required and you don’t need an appraisal.
Recasting Disadvantages
Similar to prepayment, recasting has some potential snags. You can’t use it for FHA* or VA** loans, and your lender may charge a service fee to recast.
Do the Math
The best way to measure the benefits of prepayment and recasting is analyzing them side by side.
Run the numbers on prepayment using this mortgage payoff calculator to see how much you could save on interest. Then, use this mortgage loan calculator to see how much you could reduce your monthly payment with recasting.
Finally, compare the results to your goals and budget to decide which one makes sense for your bigger financial picture.
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*Federal Housing Authority
**Veterans Administration
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Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.
My husband and I want to buy a house, so I wanted tips and advice on getting the right mortgage. I didn’t know prepayments on your mortgage can make the loan term shorter. I’ll have to keep that in mind as we browse for houses, so we don’t miss a deal on a house we love, thanks to this post!
Hello Sarah, thanks for the feedback! Another good couple of blogs to read to help you choose a mortgage lender and get a good mortgage are:
https://www.getloans.com/blog/top-15-mortgage-questions-ask-lender-broker/
and
https://www.getloans.com/blog/how-to-find-the-best-mortgage-lender/
Let me know if I can help. Good luck!
How does the interest saved with recasting or with prepayment compare? If you prepay $100k once a year without recasting, or recast after a $100k lump sum payment, is the overall amount of interest saved the same? Obviously there are other benefits to recasting (e.g., lower monthly payments free up cash), but does recasting save more on overall interest paid than prepayment?
There would be some very complicated math to answer your question, that goes beyond my pay grade 🙂 For example, if you recast you are lowering your monthly payment, and can take the cash you’re saving on your monthly payment and invest it and have that investment earning dividends and interest and compounding over the years. Whereas if you pre-pay all you get is a pay off of the back end, by having the loan paid off earlier. So you really have to make a lot of various assumptions that are hard to make. I think the answer is to do what best suits you, whether you want to save cash on a monthly basis immediately (then recast) or if you want to shorten the term of the loan and get it paid off more quickly (then prepay). Everything else should be secondary.