WHY CONSIDER INCREASING PAYMENTS?
Many people consider making faster or lump sum payments on their mortgage. This is a good strategy if you can afford it because it accelerates building equity. Property is often the best investment you can make [see our blog post on value of home investment here]. So accelerating building your equity so you can re-invest is wise.
PRE-PAYING PRINCIPAL
Pre-paying principal on a fixed-rate mortgage shortens the term of the loan, but the payments stay the same. This is like driving faster to get to your destination faster. So the money you pay each month is higher than what you normally would pay. But instead of ending the payments in the regular length of time, you will finish paying off the loan earlier.
RECASTING YOUR MORTGAGE
Recasting a mortgage with a lump-sum principal payment lowers monthly payment amounts for both principal and interest payments. However, the term of the loan remains the same. Recasting or re-amortization gets you to the destination at the same estimated time of arrival but by using less fuel.
WHICH IS BEST FOR YOU?
Deciding whether to pre-pay or recast your mortgage depends on a lot of factors. Your personal cash flow and investment goals will help determine which of these processes are best for you, or if it is better to continue paying your mortgage according to the original terms.