<p>We recently sold our home and want to pay down (not pay off) our new mortgage with the proceeds. </p>
<p>I thought that we could simply make a large payment, keep the term of the mortgage the same and have a significantly lower payment. We’ve never had a mortgage before and apparently I was wrong in this assumption. We have not spoken to the institution that is holding our mortgage yet, as I just realized this last night. </p>
<p>Of course, by refinancing now, our interest will be higher and we’ll be subject to closing costs. </p>
<p>Any suggestions or advice would be greatly appreciated.</p>
<p>I would first contact your current mortgage company and determine if they can do a quick refi for you. You won’t necessarily save any costs and won’t get your current rate, but it might be an easier way to go. </p>
<p>Next call a few other lenders and see what they offer. There really is not a way around the closing costs or different rate. You might be able to use the same appraisal if it is fairly current. That will depend upon the lender though.</p>
<p>You need to read your loan note - meaning the promissory note, which in some states is part of the mortgage and in others separate. It will say if prepayment is allowed and under what terms. Some mortgages have prepayment limitations, as in you can’t prepay in part for x years. The wording will be pretty clear.</p>
<p>Don’t simply make a large payment because the mortgage company might apply that to future payments - for example, if your mortgage payment is $2,000/mo and you pay them $10K they might simply apply that $10K as the payment for the next 5 months. The problem with that is that much of the money will go towards interest - not just principal.</p>
<p>Instead - you likely want to apply the $10K to principal only and on top of that continue to make your regular payments for the next 5 months (i.e. for a total of $20K). This way you actually pay down the loan somewhat where you’ll owe $10K less than you did before the payment. This is how you’ll get the loan paid off quicker than the regular term and how you’ll end up paying less interest overall. </p>
<p>Many payment coupons (if you have those) have a line where you can specify any extra principal payments so it’s often very simple to do this. However, you can always check with the loan company to see how to do this to make sure the payment is fully applied towards the principal.</p>
<p>You can’t change the amount of your monthly payment without taking out a brand new mortgage. Of course, you could use the proceeds from selling your house to make up paying a lower amount from current income every month. For example, if you’re currently paying $2,000 a month toward your mortgage and you have $10,000, use $1,000 a month from the $10,000 and for 10 months, your mortgage payment will effectively be reduced to only $1,000.</p>
<p>Unless you took an adjustable rate mortgage, which will automatically recast when the loan adjusts and give you a new payment schedule based on your current rate, outstanding balance, and remaining term. </p>
<p>If you took a fixed rate loan, your prepayment toward principal will not affect your monthly payment. Call your lender and ask if they are willing to do a loan modification or one time recast so that your payments are based on your current outstanding principal balance.</p>
<p>If you ever have to do this again, the best way to set it up (if it’s possible – it used to be) is to take a purchase money HELOC (home equity line of credit). For example, if you think at the end of the day, you’ll only need $150K in mortgage money but at the outset, you need $250K, you would take a first for $150k and a HELOC for $100K, then when you get the proceeds on the sale of your home, you can pay off the 2nd mortgage (HELOC) and be left with the $150k lien.</p>
<p>Having never heard of the term “recasting”, and after a bit of research, I now realize that I thought this was something that would automatically happen once we made a large payment from the proceeds of the sale of our house.</p>
<p>Our mortgage is a conventional 15 year. We had a large down payment, no PMI and no taxes escrowed. Of course, a month after our closing, the mortgage was moved to a servicing company (Provident Funding).</p>
<p>I will be calling on Monday to ask about recasting. My question is this: is there any reason why they wouldn’t (or couldn’t) do this? Is this something that I can use to negotiate? In other words, can I tell them I will be refinancing with another lender if they can’t do this?</p>
It can be quite difficult these days to determine who actually owns your mortgage, which makes contacting them problematic.</p>
<p>Also, mortgages are recorded in some fashion with your state or county, and if the original mortgage doesn’t already allow for the kind of change you want to do, a new one would have to be recorded, and now lawyers are involved and expenses are incurred. So they may not be willing to do that.</p>
<p>I think your best bet is to refinance. If you don’t want to pay closing costs again, look into no points-no closing cost loans. If your balance is dropping a lot your rate may increase a bit because the lowest rates are for large mortgages ($150-200K or higher non-jumbo loans). You could also go to a ten year mortgage, which will have a lower rate, and should still give you a lower payment since you are paying down a lot of it.</p>
<p>Or you could just bite the bullet and pay your current mortgage off much quicker… with the balance after you pay it down, how long will it take to pay it off at your current payment?</p>
<p>I’m assuming you owned two houses (‘old’ house that you just sold and ‘new’ house that you are currently living in and new house has the mortgage). </p>
<p>If you make lump sum payment on a mortgage, it’s assumed it is on the back end of the mortgage and your monthly payments do not change, althought the composition of principal and interest do. You have two choices:</p>
<ul>
<li>try to renegotiate the payment terms of your mortgage to continue with the existing interest rate & term, but with a lower payment.<br></li>
<li>keep the money in a bank account and pay as agreed.<br></li>
</ul>
<p>With option #1 and threatening to refi elsewhere may or may not work in your favor. It will depend on who now owns your mortgage. A servicer may not want to lose the fees it makes on the servicing or they may not care. </p>
<p>Many states have outlawed prepayment penalties.</p>