This seems to be everyone’s dream every time you become a home-owner. We hate to see the amount of money that goes towards interest and how very little goes towards our capital. We are going to talk about what exactly does the bank do with the additional payments that you give and how does your mortgage look afterwards.
You need to know what happens to your mortgage after you make a large lump sum. How do you know what was allocated to what, and what exactly does your mortgage look like at the end of the day? That’s exactly what we’re going to find out.
Let’s assume that you want to make a large payment and your total mortgage is $200,000 and your monthly payment is $2,000. When you check the statements, it gives you a distribution of what went to interest and what went towards principal.
Paying off your mortgage fast: Two ways
You will continue to make that $2,000 payment, but now the distribution is going to be as follows: Let’s say $1,600 is going towards the interest rate, but now you have $400 going towards your principal. That would be great because now you’re seeing that more of your money is actually going towards paying down the debt versus before when you didn’t make that large sum and you were only paying $100 towards the mortgage.
1. What this in essence does is that if your mortgage was originally a 30-year mortgage, if you continue doing this structure and maybe every couple of years you make another contribution for a large lump sum, you will wind up reducing your mortgage to maybe 20 years. If you continue to do that, maybe 15 years, and if you continue to do more, maybe you can just reduce your mortgage down to 10 years. That’s one way to go about it.
2. The second way to go about it is that you can reach out to the bank. Now, this is a service that not all banks offer, but if they do, you can actually reach out to them and ask for a mortgage recast.
If you don’t know what that is, don’t worry. We’re going to show you what that’s about:
What’s a recast? A mortgage recast, in essence, is an adjustment made on the amortization schedule, depending on how much time you have left in the mortgage. For example, back to the original amount, where we were talking that you have a mortgage of $200,000, and you ended up making a large lump sum payment of $30,000.
You made a big contribution towards that mortgage and you expect to see your mortgage to be reduced by $30,000. Before you made that payment, your payment was $2,000 every month.
After you make that payment, if you have the option, you can call the bank and ask them to do a recast. What they do is that depending on how much time you have left on your mortgage, they’re going to do adjustments of the amortization schedule. They’re just simply going to make an adjustment on the interest that you have to pay for the remaining 30 years.
What’s going to happen is that, now instead of paying $2,000 every month, you are going to have a smaller payment or a smaller debt obligation. Your mortgage could go down to $1,600 a month as opposed to doing a payment of $2,000.
Either way, it’s gonna work out. If you chose the first one and don’t request a mortgage recast, what you wind up doing is just paying off your mortgage faster even though you won’t see any changes in your monthly payments, but you’re reducing the number of years.
Paying off your mortgage fast: The process
In this case, you will continue to have a mortgage for 30 years if you do request a recast, but then you’re going to see a reduction on your mortgage payment going from $2,000 to let’s say, for example, $1,600. Not all mortgages can do this. Not all banks will allow you to do this, but you can always give them a call and find out to see if that’s something that they will be willing to do for you.
If they do, the process is as follows:
- They’re going to send you a form, usually via email or fax
- You are going to fill it out and request the permission
- The bank is going to take some time to review that. About the length, they usually take somewhere between two to three months to do that.
- If you are approved you’re going to have to pay them a fee for all the light work that they have to do, but it’s a relatively small fee (between $200 to $500).
It’s usually not so much, but even though it’s from $200 to $500, they will make an adjustment to your mortgage payment, and you eventually are going to have a smaller debt obligation. For example, if over time you can still pay $2,000, but your debt obligation is $1,600. You can still continue to make your payments of $2,000, which means the additional $400 is just going to keep going towards your principal, and therefore you can pay off your mortgage even faster now because you have smaller payments.
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