Most home loans are traditional installment loans. In other words, you borrow money and pay it off (with the same monthly payment) over a time period that you and your lender agree to. Part of each payment is a repayment of your loan, and part of the payment is your interest cost.
To learn how this works in detail, see how loan amortization works.
Set in Stone?
Your loan may be arranged so you’ll make the same monthly payment over the next fifteen or thirty years. However, things change. You may come into a large lump sum or find extra money in your budget.
Paying a loan off early allows you to spend less on interest. You have to weigh the pros and cons of an early payoff to decide if it's the right choice. One of the reasons people repay early is to enjoy lower monthly payments going forward, but does that happen automatically?
For most loans, the answer is no. You’ll have to recast a mortgage if you want to reduce your payments. Lenders won’t do it unless you request it - and you usually have to pay a fee (a few hundred dollars is normal).
Recasting a Mortgage
When lenders recast your mortgage, they calculate a new amortization schedule based on your new loan balance. Your monthly payment is based on a few inputs: loan balance, interest rate, and number of payments (or time) to repay. Changing any of those variables (the loan balance in this case) results in a different payment.
If you want to see how this works or run some what-if scenarios on your loan, try calculating loan payments on your own or use a loan amortization calculator. Just update the loan balance and the number of years remaining on your existing loan.
Request a Recast
If you like the idea of recasting your mortgage, contact your lender before making any additional principal payments. Lenders are able to - but not required to - recast mortgages when you pay extra. Find out if it’s possible and what it will cost.
You should also evaluate alternatives like refinancing and making extra payments.