Prepayment Versus Recast

October 15th, 2018

Mortgage prepayment versus recast

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 Mortgage, a division of Capital Bank. 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 Mortgage or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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