Mortgage Myth: Putting a large amount of over $10,000 towards your mortgage after closing will reduce the payment automatically

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I receive calls every day from homebuyers looking to sell their current home who want to use the equity from that home for the down payment.  There is one problem, their current home is not sold yet and it will not be sold and closed before they need to close on their new purchase. What can we do? How can they purchase the new home and achieve the payment that they set out to have?

The solution is called a mortgage recast. Mortgage recasting offers two attractive benefits for homeowners with some extra cash in their pocket: lower monthly payments and less interest paid over the life of the loan.

First, borrowers must make a large lump-sum payment toward the loan principal. Lenders usually require $10,000 or more to recast a mortgage. The remaining balance is then amortized to reduce the monthly payments. There are usually fees associated with recasting. The fees vary by lender but they typically don’t exceed a few hundred dollars.

Recasting not only results in lower monthly payments but borrowers will also pay less interest over the life of the loan. For example, if your 30-year mortgage carries a principal balance of $200,000 with a 5% interest rate, you might pay $1,200 per month. If you spend $50,000 to recast your mortgage, plus a $350 recasting fee, you’ll end up saving almost $35,000 in interest payments and about $300 per month in monthly mortgage payments. So, the moral of the story is that a recast can save you from a full refinance and avoid the higher fees and possibly a higher interest rate.  It will also allow you to purchase sooner than you might have thought, with the silver lining of being able to quickly put more money down and lower the monthly payment to something more manageable.