Author Topic: Mortgage prepayment change minimum or duration?  (Read 3942 times)

gatorNic

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Mortgage prepayment change minimum or duration?
« on: November 30, 2014, 08:34:56 PM »
Was just wondering when you prepay a mortgage if they recalculate your minimum payment or if they change the duration of your loan to maintain your current monthly payment?

I had a student loan where I paid more than the minimum and they would adjust the monthly minimum payment quarterly, so it maintained the timeframe of the original loan. 

mveill1

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Re: Mortgage prepayment change minimum or duration?
« Reply #1 on: December 01, 2014, 03:31:29 AM »
Usually, the latter. Your agreed payment stays the same, and you'll be done paying it off earlier. To keep the same term I think you'd have to refinance.

Rural

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Re: Mortgage prepayment change minimum or duration?
« Reply #2 on: December 01, 2014, 06:36:42 AM »
Depends on the loan.

thd7t

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Re: Mortgage prepayment change minimum or duration?
« Reply #3 on: December 01, 2014, 07:24:57 AM »
These are US examples:

If you have a mortgage, and make a prepayment, that will reduce your term.  However, if you make a large prepayment on a conventional (non-FHA) mortgage, you can ask your lender to recast your mortgage for a nominal fee (usually around $200).  There is usually a minimum size for the large payment.  With recasting, they will keep your original schedule, but they will reduce your payment to fit that schedule.  This will result in more interest, but if your rate is low and you value cash flow (for higher return investments, for instance), it can free up money each month for you.

Cheddar Stacker

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Re: Mortgage prepayment change minimum or duration?
« Reply #4 on: December 01, 2014, 09:21:35 AM »
These are US examples:

If you have a mortgage, and make a prepayment, that will reduce your term.  However, if you make a large prepayment on a conventional (non-FHA) mortgage, you can ask your lender to recast your mortgage for a nominal fee (usually around $200).  There is usually a minimum size for the large payment.  With recasting, they will keep your original schedule, but they will reduce your payment to fit that schedule.  This will result in more interest, but if your rate is low and you value cash flow (for higher return investments, for instance), it can free up money each month for you.

That's a nice little summary, thanks for providing it. However, I have to laugh at the last sentence because it should also say at the end:

"Which is the same effect as just not making a prepayment in the first place"

Meh.

gatorNic

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Re: Mortgage prepayment change minimum or duration?
« Reply #5 on: December 01, 2014, 10:55:41 AM »
These are US examples:

If you have a mortgage, and make a prepayment, that will reduce your term.  However, if you make a large prepayment on a conventional (non-FHA) mortgage, you can ask your lender to recast your mortgage for a nominal fee (usually around $200).  There is usually a minimum size for the large payment.  With recasting, they will keep your original schedule, but they will reduce your payment to fit that schedule.  This will result in more interest, but if your rate is low and you value cash flow (for higher return investments, for instance), it can free up money each month for you.

Interesting info thanks.  Didn't realize you could recast.  I wish it was automatic like my student loan was though.  Just have to look into this and prepayment penalties

thd7t

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Re: Mortgage prepayment change minimum or duration?
« Reply #6 on: December 01, 2014, 11:35:05 AM »
Cheddar Stacker,
I'd agree that over all, it's a Meh deal, but without knowing OP's situation, I couldn't exclude it for the already mentioned cashflow reason.  In addition, I didn't mention it, but recasting can allow you to increase the proportion of principal because you can dedicate the original payment money to principal.  I'll have to look back, but I think I learned about that from an MMM article.

gatorNic,
It's funny, my student loan does the same thing as my mortgage, reducing the timeline, not the payment.  It sounds like the amount you're paying per month is your concern, right now.  Is refinancing an option for you?  Is your mortgage or your SL a worse interest rate?  There are probably some other options you hadn't considered.

Cheddar Stacker

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Re: Mortgage prepayment change minimum or duration?
« Reply #7 on: December 01, 2014, 01:29:58 PM »
Cheddar Stacker,
I'd agree that over all, it's a Meh deal, but without knowing OP's situation, I couldn't exclude it for the already mentioned cashflow reason.  In addition, I didn't mention it, but recasting can allow you to increase the proportion of principal because you can dedicate the original payment money to principal.  I'll have to look back, but I think I learned about that from an MMM article.

If you make a large payment then recast you are trading cash in hand for a future cash flow reduction, while paying nearly the same amount of interest overall. If you're a debt killer, just kill the debt, don't bleed it out. But I would never make that prepayment in the first place.

In any case, thanks for providing the facts, and like I said it gave me a nice laugh at the end. I needed that today.

gatorNic

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Re: Mortgage prepayment change minimum or duration?
« Reply #8 on: December 01, 2014, 08:05:07 PM »
Chedder Stacker you are correct in many ways it is a wash and killing the debt would always be a priority.  Since there is PMI, I would prepaying to get to 20% equity to get rid of the insurance as soon as possible.  So essentially I just wanted to know what would happen on most loans when prepaying like that if it would keep the time period or reduce payment. 

Cheddar Stacker

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Re: Mortgage prepayment change minimum or duration?
« Reply #9 on: December 01, 2014, 08:44:35 PM »
Got it. Then I would make the prepayment. Then another one, then another. Make sure you know how low you need to get (80% or 78%) and make sure there isn't a time restriction like 2 years or 5 years. Sometimes there are little hidden gems in the PMI agreements. Talk to the lender.

If you can't get out simply by paying a few big extra payments, you might need to refi as well to get out from under it. In any case, do that as quicly as possible since PMI tends to be a crazy high charge.

windypig

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Re: Mortgage prepayment change minimum or duration?
« Reply #10 on: December 01, 2014, 09:04:54 PM »
Pre payments to adjustable rate mortgages lowers your monthly payments at every readjustment period. Prepayments to fixed rate mortgages shortens the length of your loan but you still pay the same every month until the end.

gatorNic

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Re: Mortgage prepayment change minimum or duration?
« Reply #11 on: December 01, 2014, 09:36:29 PM »
Pre payments to adjustable rate mortgages lowers your monthly payments at every readjustment period. Prepayments to fixed rate mortgages shortens the length of your loan but you still pay the same every month until the end.

That would make sense.  The student loan I had was private and variable, thus why I wanted to kill it as quickly as possible.  So I would guess thats why that one kept the time period and reduced the payment