Can I Make a Large Payment on My Mortgage?

Making a large, lump sum payment on your mortgage can be an attractive option if you come into extra funds Paying down your mortgage principal faster saves money on interest and shortens the loan term However, don’t expect an automatic reduction in your monthly payments. Here’s what you need to know about making extra mortgage payments.

How Mortgage Amortization Works

When you take out a mortgage, you agree to make regular monthly payments over a set period, usually 15 or 30 years. Each payment is made up of two components:

• Principal – The portion of the payment going towards paying down the loan balance
• Interest – The fee charged by the lender for borrowing the money

In the early years, most of each payment goes towards interest charges. Over time, as the balance is paid down, more of the payment is applied to principal. This process is called amortization.

The amortization schedule and monthly payment amount stay the same unless you refinance the loan or make changes through recasting. So making extra payments doesn’t automatically lower your required monthly amount.

What Happens When You Make a Large Payment?

Let’s say you make a $50,000 lump sum payment on a $300,000 mortgage with a 4% interest rate and 20 years remaining. Here’s what happens:

• The extra funds pay down your principal balance faster. After the payment, your balance is $250,000.
• You’ll pay less interest over the life of the loan by having a lower principal balance.
• Your monthly payment stays the same. The payment is still calculated based on the original amortization schedule.

So you save significantly on interest and will pay off the loan faster. But you won’t have more cash flow each month unless you recast the mortgage.

Should You Recast the Loan?

Recasting means recalculating your monthly payment by re-amortizing the loan based on the new lower principal balance. This requires contacting your lender to request they recast the mortgage after your extra payment.

For example, after recasting based on that $50,000 payment, your new balance is $250,000 paid over the remaining 20 years. At 4% interest, your new monthly payment is around $1,400 instead of $1,700.

Recasting pros

• Lower monthly payments free up cash flow
• Motivating to see payment go down each month

Recasting cons:

• Payments won’t drop much with small extra payments
• Lender may charge a fee or limit how often you can recast
• Flexibility of funds is lost when paid towards mortgage

Do the math to see if recasting is worthwhile based on your payment amount, interest rate, and loan balance.

Other Options for Extra Funds

Besides paying down your mortgage faster, consider these options for extra cash:

• Invest it for potentially higher returns
• Build up an emergency fund
• Pay off higher interest debt like credit cards
• Save for other goals like retirement or college

The flexibility of keeping funds liquid or invested rather than tied up in home equity may make more sense, especially if your mortgage rate is low. Crunch the numbers thoughtfully before committing money.

Strategies to Pay Off Your Mortgage Faster

If your goal is becoming mortgage free quicker, here are some strategies beyond lump sum payments:

• Pay half your payment every two weeks – This adds up to an extra monthly payment each year.
• Round up your payment – If your payment is $1,000, send $1,010 or more each month.
• Pay an extra $100 each month – Small amounts add up over time.
• Make one extra payment yearly – Such as using your tax refund or bonus towards the principal.
• Refi to a shorter term – Reduce your timeline to a 15 or 20 year mortgage.

The Benefits of Paying Off Your Mortgage Early

Here are some excellent reasons to pay off your home loan ahead of schedule if possible:

• Pay less interest over the life of the loan
• Build equity and wealth faster through forced savings
• Eliminate mortgage payment in retirement for reduced expenses
• Sense of achievement and financial freedom when debt-free

Evaluate your budget, savings goals, and risk tolerance to decide if aggressive mortgage payoff aligns with your situation. Understand how extra payments work and consider recasting to maximize the benefit of putting extra funds toward your home loan principal.