A little-known feature called a ‘mortgage recast’ can help you pay off a home loan.
Throughout my childhood, I gleaned many financial lessons from my father. One of the most important came from his obsessive desire to get rid of her monthly mortgage payment.
Dad hated debt, which he described as a form of bondage. Just before he retired, he paid off his home, freeing himself from the largest expense in his budget.
When I grew up some the plan was to follow Dad’s lead: Become mortgage-free before retirement. I achieved that goal.
Here are three strategies I used to clear a 15-year loan in just seven years.
Make extra principal payments automatic…
Let me say this…The steps I took won’t work for everyone, because they require having more funds than you need to maintain your household. If you can’t pay off your mortgage early, it’s okay, because I would rather you prioritized other financial goals.
As a money-saving strategy, paying your mortgage off early should come after amassing a solid emergency fund, saving for retirement or paying for your children’s college education.
With one income I were able to make extra principal payments every month. Starting out, the additional outlays weren’t very large.
But, as soon as I had enough I increased the monthly amount directed to the principal. I also was able to max out my retirement savings, while also accelerating our mortgage payoff.
If you want to stay consistent, make the principal payments automatic. If you do this, be sure to check with your lender about the process, to ensure extra payments made online or by check are in fact being applied to the principal.
You can find a mortgage payoff calculator on the Bankrate website, at bankrate.com.
Using Bankrate’s calculator, let’s say you have a 30-year fixed-rate mortgage for $400,000, with an interest rate of 6 percent. If you make your regular payments, your monthly mortgage principal and interest payment will be $2,398.20 for the life of the loan, a total of $863,354.
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If you pay an extra $200 a month toward the principal, you can cut your loan term by more than 5½ years and save $98,277 in interest.
If you increase the extra payment by $400 per month, you not only shorten your mortgage by nine years, you save $159,602 in interest.
Here’s why I made monthly payments as opposed to occasionally throwing lump sums of extra money at the principal.
I wanted to create a discipline of not incorporating all of my salary raises, bonuses or windfalls over the years into my budget. In my mind, the extra principal payments were as fixed as the regular mortgage.
As I got close to my retirement, I cashed out a workplace retirement account from a former job. (I did not incur an early-withdrawal penalty.) All those extra principal payments reduced the payoff amount so that the money in those accounts, after taxes, was enough to finish off the mortgage.
Be strategic about refinancing
When mortgage rates fall, it can create a refinance frenzy. Many people refinance because they want to lower their payments.
But if you’re not doing the math, refinancing can increase your overall interest costs, even if you have a lower monthly payment. This is especially true if you’re several years into your mortgage and a lot more of your payment is already going toward the principal. I also never used a refinance to tap our home’s equity. I didn’t want to use home as an ATM.
What home buyers need to know about soaring mortgage rates
I refinanced a few times to lower my interest rate when the difference was at least two percentage points. However, instead of incorporating the savings back into our budget, I kept making the same monthly payment. I directed our lender to use the extra funds to reduce my principal.
An online calculator can help you figure out how to attain a lower effective mortgage interest rate without refinancing.
I stuck with a 30-year fixed rate mortgage until I had accomplished certain financial goals. It gave me the flexibility to pull back on the principal payments if we encountered any major cash flow issues.
Yes, you should pay off your mortgage before retiring.
When mortgage rates dipped below 3 percent in 2016, I refinanced from a 30-year fixed rate loan to a 15-year fixed term, accelerating our payoff plan.
Take advantage of the little-known ‘mortgage recast’…
With a mortgage recast, you make a lump-sum payment toward the principal. Your mortgage is then recalculated based on the new, lower outstanding balance.
Your remaining monthly payments reflect the new amortization schedule. However, the interest rate and loan terms stay the same.
The recast lowered my monthly payment. But again, I used the savings to continue paying down the principal. It also was much easier than refinancing. Because you’re keeping the same mortgage, there’s no credit check, no new appraisal required, nor closing costs. Some lenders will require a flat processing fee of a few hundred dollars. My lender did not charge for a recast.
These retirees say: Pay off that mortgage before retiring.
Your lender may require a minimum lump-sum payment to process the recast, typically $10,000.
Not all lenders offer a loan recast. You can’t recast loans obtained from the Federal Housing Administration, the Agriculture Department or Department of Veterans Affairs.
Carefully consider a mortgage recast. Ask yourself whether there are more immediate needs for the money. Don’t deplete your savings to do it, because you might be tapping funds you’ll need later for an emergency.
There will be many who question our strategies, arguing that with a low interest rate, the additional principal payments could have been better used to invest. This is a personal decision, but for us, in addition to freeing up a lot of money every month, the guaranteed psychological return has been worth it.