What would you do if you won the lottery? What if it was only a couple thousand of dollars? How about use it to help shrink your mortgage? If used properly, some thousands of dollars can help reduce your mortgage payments.
How can you use some extra cash to ease the weight of your prolonged mortgage?
Regular overpayment helps later
Home mortgages allow borrowers to make extra payments at any time, reducing both the outstanding principal and future interest owed. Most banks would enable borrowers to mail in a check, immediately lowering the amount of principal remaining from their mortgage. This early repayment can save the borrower thousands of dollars of interest paid over the life of the loan (depending on the early repayment size). The mortgage will also be paid off earlier than scheduled, leaving him debt free months sooner. However, while it’s a likable idea to pay less interest and get out of debt quicker, it is hard to get excited about a benefit you won’t feel in your pocket for many years yet.
Recasting helps for now
With a little more effort, you can probably get the bank to approve a mortgage recast, which provides an immediate cash-flow boost. In a recast, the money is sent to the bank, but instead of lessening the number of months for which payments are owed, you would be granted a reduction in the payment amount owed per month. Because the monthly mortgage goes down, you will have a few thousand dollars in your pocket every year to pay bills or even invest in the future. The combination of significantly lowering your monthly financial burden plus interest savings is something you may find very attractive.
Ask your lender
There are some hurdles to getting a mortgage recast, however. First, not all loans are eligible: those guaranteed by government-sponsored enterprises (GSE) Freddie Mac and Freddie Mae are, but FHA loans are not. Even for GSE mortgages, if they are considered jumbo loans, the banks involved have discretion over recastings.
Regardless, borrowers need to make a recasting request to their bank, which will usually require a minimum repayment of about $5,000 or 10% of the outstanding mortgage. Finally, there are some fees involved in recasting, but these are significantly less than what a full refinance costs, plus the borrower can keep their current interest rate and repayment schedule. Most larger lenders, including Chase, Wells Fargo, and TD, do offer recastings, and you should call your mortgage company to find out the details.
Recast plus early payoff
Should you recast, nothing is stopping you from also getting an early payoff with its maximum interest reduction. While the recasting would lower your monthly required payment, you can still continue sending the full payment you always did. By noting on the payment that the extra should be used to pay off even more principal, your interest will be lowered accordingly, and you’ll finish off your mortgage earlier.
But because of recasting, whenever you are tight for cash, you can pay just the a smaller payment without triggering late payments or default notices. Having this flexibility over the future years seems to be worth the bit of effort and money needed to put the new payment structure in place.
Recession insurance
Even when the economy is striving, the good times will not roll on forever; they never do, as downturns are an inevitable part of the business cycle. Anyone with substantial mortgage payments should consider recasting if they come into a large bonus or commission. They can keep making the full payments afterward, but using a recast to lock in the option of a lower household overhead is worthwhile “recession insurance.” The family home is not the place to carry excessive risk.
I thank Isaac Gluck of the Leiman Mortgage Network for his professional input into this article.
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