I’m getting ready to pay some extra money towards my mortgage loan, and remembered that I have an option to re-amortize my mortgage loan if I make a substantial principal prepayment. This is also known as “recasting” a mortgage. Basically, my monthly payments are lowered slightly over the same remaining term instead of simply accelerating my loan payoff schedule. My interest rate and escrow payments stay the same, and I don’t have to pay any fees or closing costs.
Most loans that are sold off to investors do not allow recasting, as I imagine they don’t want the added complexity. However, some allow either a one-time recast, and other allow repeated recasting if the extra payment is large enough. Ask your lender about this feature beforehand if you’re interested in it. In my case, I get to re-amortize whenever I pay a lump-sum of at least $10,000.
My tentative plan, discussed briefly in my Quick & Dirty Plan To Reach Financial Freedom, is to make two extra mortgage payments a year. (If interest rates rise enough, the money will simply be placed into a long-term bond.) This will shorten my 30-year mortgage by an entire decade, so I’m mortgage-free in 20 years at age 50. The commonly discussed biweekly payment plan is the same as making one extra mortgage payment each year, and knocking off about 5-6 years.
For my mortgage, if I pay exactly $10,000, it would only lower my normal mortgage payment about $50 a month. Theoretically, if I keep my payments the same as if I didn’t re-amortize, my total interest paid would be the same, and my loan would still be paid off 10 years early. The lower required mortgage payment would simply provide an added bit of flexibility in case I run into financial trouble.
However, for my situation the $10,000 requirement would mean I’d have to wait and lump my payments every other year instead of making the payments whenever I like. I don’t think $50 a month is worth the added hassle, as I really do want to have this thing paid off in 20 years.
(As a reminder, I think paying extra towards your mortgage should only be done after you have maxed out your tax-deferred accounts like IRAs/401ks, as well maintaining an emergency fund or other liquid assets.)