Refinance, Recast or Pay Down Mortgage?

Dear Dr. Don, I recently bought a home and borrowed $360,000 at a rate of 4 percent. I was only able to pay 10 percent as the down payment because I hadn't yet sold my old house.

Now that I have sold my old house, I have another $90,000 to pay down the $360,000 I borrowed. A finance friend of mine suggested I refinance instead of paying down the principal on the $360,000 loan. This doesn't make sense to me unless I could find a lower rate, especially since I don't want to pay closing costs again.

With this extra $90,000 I now have, should I just put it toward the principal of the loan I have or refinance? -- Steve Stockpile

Dear Steve, Before doing anything else, review your mortgage loan documents to make sure there's no prepayment penalty for making a big additional principal payment or for refinancing your loan so soon after your initial closing.

Making a $90,000 additional principal payment will shorten the effective loan term, but it won't reduce your monthly payment. To do that, you'll have to ask your lender if it is willing to recast your mortgage. Recasting the loan shouldn't cost much money.

A recast is when a homeowner applies an additional sum of money to substantially reduce the unpaid principal balance of his or her loan and lower the monthly payment. The loan term and interest rate remain unchanged. But, re-amortizing the loan based on the newly reduced principal amount would result in a lower monthly payment.

Even though you just got the current loan, it can make sense to pay the closing costs and refinance instead. Check whether you can capture a lower interest rate and if you expect to stay in the home long enough to recoup those closing costs and realize savings on your interest expense. At 4 percent, you already have a great mortgage interest rate. It's possible there's not enough interest savings to justify refinancing over your planned horizon for owning the home.

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