A recast mortgage payment calculator is a practical tool for homeowners looking to reduce their monthly mortgage payments without the need to refinance their mortgage. This calculator helps you understand how making a significant lump sum payment towards your mortgage's principal balance can lower your monthly payments, keeping the original loan's interest rate and term constant.
Purpose and Functionality
The essence of a mortgage recast lies in its ability to adjust your monthly payments downwards after you've paid a substantial amount towards the loan's principal. Unlike refinancing, a recast keeps your interest rate and loan term unchanged. It's particularly beneficial for borrowers who've come into a large sum of money and wish to lower their debt without the closing costs associated with refinancing.
How It Works:
- Inputs Required:
- Outstanding Principal Balance (OPB): The current balance of your mortgage.
- Lump Sum Payment (LSP): The additional amount you want to pay towards the principal.
- Interest Rate (IR): Your mortgage's annual interest rate.
- Remaining Loan Term (RLT): The time left until your mortgage is fully repaid.
- Calculations:
- New Principal Balance (NPB): Subtract the lump sum payment from the outstanding balance.
- Monthly Interest Rate (MIR): Divide the annual interest rate by 12 and then by 100 to convert it to a decimal.
- Recast Mortgage Payment (RMP): This is calculated using an annuity formula, taking the new principal balance, the monthly interest rate, and the remaining loan term into account.
Step-by-Step Example
Consider a scenario where you have a remaining mortgage balance of $200,000, an annual interest rate of 4%, and 20 years left on your loan. You decide to make a lump sum payment of $30,000. Here's how the recast would work:
- Calculate the New Principal Balance:
- NPB = $200,000 - $30,000 = $170,000
- Determine the Monthly Interest Rate:
- MIR = 4 / 12 / 100 = 0.003333
- Compute the Recast Mortgage Payment:
- RMP = $170,000 × 0.003333 / (1 - (1 + 0.003333)^-240)
- This calculation yields a new monthly payment of approximately $1,030.17, significantly lower than the original payment.
Relevant Information Table
| Term | Definition |
|---|---|
| Outstanding Principal | The amount you currently owe on your mortgage. |
| Lump Sum Payment | Extra payment made towards the principal of your loan. |
| Interest Rate | The yearly cost of borrowing the principal, expressed as a percentage. |
| Remaining Loan Term | The duration left to repay the loan, typically in months or years. |
| New Principal Balance | The principal amount after subtracting the lump sum payment. |
| Monthly Interest Rate | The monthly cost of borrowing, derived from the annual interest rate. |
| Recast Mortgage Payment | Your new monthly payment after the recast process. |
Conclusion
The recast mortgage payment calculator is a straightforward yet powerful tool for managing your mortgage more effectively. By making a sizable lump sum payment towards your loan's principal, you can enjoy reduced monthly payments without altering your interest rate or extending your loan term. This option is ideal for homeowners who have received a windfall, such as a bonus or inheritance, and wish to use it to decrease their financial burden. Not only does recasting provide immediate relief in monthly expenses, but it also contributes to long-term savings on interest, making it a financially prudent strategy for managing your mortgage.