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Recasting a loan implies to recalculate the amortization table, after paying a large sum towards the principal, lowering the remaining amount.
The reasons for paying off a mortgage early can be many, it may be that you have managed to save a little money and you want to use it to reduce your debt or also that interest rates have risen and your mortgage payment has skyrocketed.
When you prepay a portion of the outstanding principal on a mortgage loan, as with most installment loans, you must choose between reducing the number of installments (reducing the term) or keeping it and reducing the amount of each payment.
When recasting a mortgage, is it better to reduce the payment amount or the term?
The answer to this question is: it depends. The most economical option will always be to reduce the term, since the total amount of interest will be less than reducing the installment. However, reducing the amount of the monthly payment can be an important relief that helps to reach the end of the month more easily.
If you can easily afford the monthly payment, then we recommend that you choose to shorten the repayment period. If you need to have more liquidity for other expenses or the amount has gone up because interest rates have gone up, your option will be to reduce the installment.
To make this decision easier for you, there are tools like our mortgage recast calculator, with which you can quickly evaluate the option that suits you best.
How to use our loan recast calculator?
Although we have focused on mortgages, the truth is that this calculator can be used to recast any type of installment loan, such as personal loans or auto loans to buy a car.
Its use is very simple, you only have to indicate the amount pending, the number of installments or monthly payments remaining to finish repaying it and the interest rate currently applied to your mortgage.
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Next, enter the amount you want to repay early and click the Calculate button.
In the results you will obtain, on the one hand, the amount of the monthly payment that you will obtain while maintaining the installment, which, obviously, will be the same as the one you are paying (it may vary slightly).
On the other hand, you will obtain the amount of the installment if you keep the term fixed. You will pay the same number of installments, but each one will be lower.
In addition, for each of the results we calculate the total amount you will pay for the remainder of the mortgage, simply by multiplying the amount of the installment by the number of monthly payments.
As you can see, for any simulation you do, you will always pay less in total if you keep the installment (reduce the term) than if you keep the term (reduce the monthly payment).
Español: Calculadora para amortizar hipoteca. ¿Mejor cuota o plazo?