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Old 06-02-2015, 02:31 PM
 
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I have a $500,000 mortgage 30 year mortgage, 4% interest. My monthly payment is about $2600 (of which $800 is principal and $1800 is interest). If I want to make a lump sum principal payment of $400,000, what are my options going forward?

Option #1) I understand if I recast, my monthly payment will be much lower (about $400 total, of which $100 is principal and $300 is interest) but it won't shorten the loan.

Option #2) If I do not recast, then even though my principal balance is reduced, my monthly payment stays the same at $2600. Question is does the portion of my payment going to principal and the portion to interest change starting next month? Or does next month's interest still hover around $1800? Or does it get adjusted to the $300 interest same as if I had recasted? I called my loan company and they are telling me the former, that my interest still remains around $1800 and does not change, only that my loan is shortened. Is that accurate?

The other alternative would be refinancing but not sure if it's worth it. I plan to pay off the remainder of the $100,000 balance within 12 months.

Thanks!
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Old 06-02-2015, 02:42 PM
 
Location: Phoenix, AZ > Raleigh, NC
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If it's only a year, I'd keep the $400K until I could pay the entire loan off.
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Old 06-02-2015, 03:02 PM
 
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Quote:
Originally Posted by Jkgourmet View Post
If it's only a year, I'd keep the $400K until I could pay the entire loan off.
And not save $1500/interest per month? Why would I do that?
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Old 06-02-2015, 03:43 PM
 
Location: Denver CO
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If you are going to pay it off in a year, what difference does it make that recasting it doesn't shorten the loan? Recast it, pay your normal payments to help bring it down even more, and then in a year, pay off the balance. Definitely not worth doing a re-fi though.
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Old 06-02-2015, 04:09 PM
 
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Quote:
Originally Posted by emm74 View Post
If you are going to pay it off in a year, what difference does it make that recasting it doesn't shorten the loan? Recast it, pay your normal payments to help bring it down even more, and then in a year, pay off the balance. Definitely not worth doing a re-fi though.
I'm not looking to shorten the loan. My question is simply, if I pay down the principal balance and don't recast thus allowing my mortgage monthly payments to remain the same ($2600), does my next month's interest get reduced (down to $300) or does it remain at the same level ($1800).
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Old 06-02-2015, 04:41 PM
 
Location: Austin
7,077 posts, read 16,885,085 times
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Quote:
Originally Posted by meanieme View Post
I'm not looking to shorten the loan. My question is simply, if I pay down the principal balance and don't recast thus allowing my mortgage monthly payments to remain the same ($2600), does my next month's interest get reduced (down to $300) or does it remain at the same level ($1800).
The interest is in arrears so the next month is probably still the higher amount because that was the balance that previous month. After that, interest is only on what you owe, so of course your interest would decrease and the principle amount would increase.
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Old 06-02-2015, 08:15 PM
jw2
 
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Each month, the interest is rate/12*principal

If you had a balance of $100,000 at 4%, the interest is $333.34. The rest of your $2600 payment goes to principal

The next month, since your principal balance is now $97,733.34, the interest is $325.78. The rest of the payment goes to principal.

etc.
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Old 06-02-2015, 10:04 PM
 
Location: Southern California
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Quote:
Originally Posted by meanieme View Post
I'm not looking to shorten the loan. My question is simply, if I pay down the principal balance and don't recast thus allowing my mortgage monthly payments to remain the same ($2600), does my next month's interest get reduced (down to $300) or does it remain at the same level ($1800).
Yes, in both of your scenarios, the results will be the same outcome and cost. Most people consider paying off the loan in 12 months, shortening the loan.
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Old 06-03-2015, 08:13 AM
 
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Thank you all for your insights. I called the loan center again and today they said my interest will get readjusted next month even if I keep my monthly payment amount the same and not recast. This is different than what the loan center told me yesterday. I get each service rep has incorrect knowledge
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Old 06-03-2015, 08:26 AM
 
Location: Boise, ID
8,011 posts, read 22,499,039 times
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I've never heard of loan recasting, and I've worked in a real estate office for 15 years. Learn something new every day. I always thought the only way to change your monthly payment was to refi. Thanks for posting this question, you taught me something. Although it appears that the reason I've not heard of them is that they are not allowed on many mortgages and are therefore pretty rare.

As for your original question, Falconhead was the most correct. Depending on where in the billing cycle you make the extra payment, the following payment will have more going to principal, but possibly not as much as subsequent months. You pay for the interest that accrued during that month. So if you paid off early in the month, not much interest accrues. But if you pay the lump sum near the end of the billing cycle, almost all of the normal $1800 interest will have accrued.

Regardless, in following months, your payments will be almost entirely principal, and very little interest, which is what you are wanting to accomplish.
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