https://www.youtube.com/watch?v=PRG3CaebjwM
Betty is in Michigan with our question. She says, "Our mortgage is their only debt we have on paper," in quotes. We currently have 19 years left to pay off the mortgage, but this does not reflect the extra we have paid. We recently checked into refinancing to get lower payments so we could throw more money at the principal. That's not necessary. I've written to not make it much of a difference to do that, so we chose not to.
Have you ever heard of recasting a mortgage with the bank? In my initial investigation, it looks convoluted, confusing, and does not appear to have much of a positive effect on the investor. Listen, mortgages are calculated as simple interest. So, if you have a 6% mortgage, that's 0.5 or half a percent a month (6% a year APR - annual percentage rate).
So, whatever your outstanding balance that month is if you have a 6% mortgage, it is charged a half a percent on that regardless of when you paid extra, whether it was a 30-year mortgage, a 15-year mortgage, or the next month you pay extra. Well, the last month you paid extra. If you have a traditional conforming VA FHA Fannie Mae conventional mortgage, that's how it's calculated.
Now, if you've got a rip-off mortgage of some kind with a prepayment penalty or a high-interest rate or some kind of subprime, then that's a whole different ballgame. But your typical regular mortgage recasting says, "I'm going to take my 10-year or my 19-year remaining balance and we're gonna have them recast it, reset the mortgage like it's a 20-year." All that does is lower your payments because you're going to be in debt longer, but the interest charged will be exactly the same except for that last year because you stayed in debt longer. It's that simple.
The more you pay on the principal, the next month, the more goes to the principal because every time you pay it down, if you pay it down $10,000 or if you paid down $1,000 on principal, there's that much less that's charged a half a percent the next month. So, if you had a hundred thousand dollar mortgage and you paid an extra thousand dollars or you paid a thousand dollars in principal, the next month, the half a percentage is charged on ninety-nine thousand, regardless of how you did that principal, as long as it was applied to the principal. You just don't want to prepay interest. I paid my payments for months and rents don't do that. Prepay principal.
And as long as you're doing that, recasting is not necessary on paper. It's not necessary. And you know, if you really want to kind of get real nerdy and NIT see about it, if you look at your principal balance on your amortization schedule, you know, the little schedule that prints off, they used to print them off a hundred years ago. They were on green computer paper back in the day. And they would have a column that is your principal and interest payment, then the next column is how much of it is interest, the next column is how much of it is principal, and the next column is the reducing principal balance of the mortgage every month.
And so, if it says one hundred thousand on your principal this month and you paid a thousand dollars, which was some extra principal, then you would just slide your finger down until you find that ninety-nine thousand, and that might be three months from now, four months from now that it would have been had you paid your regular payment. And so, if you really want to go be nerdy about it, that's a way you can do it, or you can set up a little spreadsheet to do it. It's really not that much because it's simple interest.
As the interest is calculated that month if it's compounded monthly on the outstanding balance on the monthly rate of interest. And so, that's all it is. It's a math formula, and it's not, you know, "I've paid all the interest." No, you didn't pay all the interest. Well, the first five years, this mortgage was all interest. That's because your payment consisted mainly of interest, but you weren't prepaying interest. The interest charged in those first five years was the exact amount due that month, and the different rest of it in your payment was the exact amount to the principal in order to fully amortize or fully pay it off during the payment term of 30 years or 15 years or whatever it is. So, you do not have to recast a mortgage to pay it off early. You have not wasted it if you refinance it because you paid all the interest on the front end. You did not pay all the interest on the front end. You paid the interest that was you that was all you paid ever unless you have a rip-off type mortgage.
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Current Mortgage Status:
Recasting a Mortgage:
Types of Mortgages:
Recasting Mechanics:
Paying Principal:
Amortization Schedules:
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