How and When to Make a Mortgage Recast

When homeowners seek to reduce their monthly mortgage payments, they generally focus on refinancing their homes. The problem with this approach is that it resets the clock on your mortgage. This can stretch out your payments over a longer period of time. While you save monthly, it can cost you more in the long run. A different approach is to make a lump-sum payment and recast your mortgage based on the lower balance. Before you decide if this is a good move for you, it can help to review the pros and cons.

Considering a mortgage recast? Consult a financial advisor to make sure it’s accounted for in your long-term financial plan.

What Is a Mortgage Recast?

A mortgage recast is a process that allows you to lower your monthly mortgage payment after making a substantial payment toward your loan principal. Instead of replacing your existing mortgage, as you would with a refinance, the lender recalculates your monthly payments based on the reduced principal balance while generally keeping the existing interest rate and remaining loan term.

For example, suppose you receive a large bonus, inheritance or proceeds from selling another property and put that money toward your mortgage principal. If your lender allows recasting, it can then re-amortize the remaining balance over the time left on the loan. Because you now owe less principal, your required monthly principal-and-interest payment typically decreases.

Recasting can be less involved and less expensive than refinancing because you are not applying for an entirely new mortgage. There is generally no need to qualify for a new interest rate, and lenders that offer recasting may charge a relatively modest fee. However, minimum principal payment requirements and other eligibility rules can vary by lender.

Not every mortgage can be recast. Conventional loans may be eligible depending on the lender and loan terms, while government-backed mortgages, including many FHA, VA and USDA loans, generally cannot be recast. Borrowers should contact their mortgage servicer to confirm eligibility and determine the required lump-sum payment.

A mortgage recast may be worth considering if you have extra cash available, want a lower required monthly payment and prefer to keep your existing mortgage rate. However, putting a large amount of cash toward your home can reduce your liquidity, so it is important to weigh a recast against other priorities such as maintaining emergency savings, paying down higher-interest debt or investing for long-term goals.

Am I Eligible for a Mortgage Recast?

Eligibility for a mortgage recast depends largely on your loan type and mortgage servicer. Conventional mortgages backed by Fannie Mae or Freddie Mac may allow recasting under certain circumstances, but individual servicers can have their own requirements. Government-backed loans, including FHA, VA and USDA mortgages, generally are not eligible for traditional recasting.

Your lender may also require you to make a minimum lump-sum payment toward the principal before it will recast the loan. The required amount varies by servicer and may be expressed as a fixed dollar amount or a percentage of the outstanding mortgage balance. Some lenders may also require the loan to be in good standing and impose limits on how frequently it can be recast.

Unlike refinancing, recasting typically does not require you to qualify for a new mortgage because the original loan remains in place. As a result, borrowers generally do not need a new appraisal or the same type of income and credit review associated with refinancing. However, the servicer may charge a recasting fee and require specific paperwork.

If you are considering a recast, contact your mortgage servicer before making a large principal payment. Confirm that your loan qualifies, how much you must pay toward principal, what fees apply and how the payment will affect your monthly mortgage obligation.

How Does Mortgage Recasting Work?

If you’re eligible, you’ll simply contact your lender and ask to recast your mortgage. They’ll typically send you a form to complete to acknowledge your request. Mortgage recasting does not require a credit check, traditional underwriting or costly fees. However, your bank may charge a nominal fee for processing the paperwork.

Although recasting does not reduce your interest rate, you will pay less interest over the life of the loan because of the reduction in mortgage balance. You will receive your new payment schedule from the bank and continue making your mortgage payments as required. Although your monthly payments have decreased, you will pay off your mortgage according to the schedule of the original loan term.

How Can a Mortgage Recast Save You Money?

A couple discusses how a mortgage recast can save them money with their lender.

A mortgage recast can save you money by reducing the amount of principal on which future interest is calculated. After you make a substantial lump-sum payment toward the principal, your lender re-amortizes the remaining balance over the existing loan term, resulting in a lower required monthly principal-and-interest payment.

For example, if you owe $300,000 on your mortgage and make a $50,000 principal payment, a recast would calculate future payments using the remaining $250,000 balance. Your interest rate does not change, but the smaller balance can reduce both your monthly payment and the total interest paid over the life of the loan.

Recasting may also cost less upfront than refinancing. A refinance typically involves replacing your mortgage with a new loan and may include closing costs, while a recast generally involves a comparatively modest administrative fee. This can make recasting appealing if you already have a favorable interest rate and do not want to replace your existing mortgage.

However, the potential savings should be weighed against what else you could do with the lump sum. Using a large amount of cash to reduce your mortgage means that money is no longer readily available for emergencies, investments or paying off higher-interest debt. Comparing the potential interest savings with your other financial priorities can help determine whether a recast makes sense.

Pros and Cons of Recasting Your Mortgage

Before deciding whether a mortgage recast is right for you, it helps to review the pros and cons. Among the advantages of this move are its simplicity and low cost.

Pros

No credit check is required: With a refinance, the bank checks your credit and underwrites a new mortgage based on your current income and financial obligations.
No appraisal is required: Lenders do not require an appraisal when recasting your mortgage.
Keeps your current interest rate: For borrowers who locked in a low interest rate before rates increased, recasting ensures that they won’t lose that attractive rate.
You don’t extend the term of your mortgage: When refinancing, your mortgage term resets. However, a recast amortized your balance over the remaining term of your current mortgage.
No lengthy application process: Refinancing can take 30 days or more and requires a lot of paperwork. With a mortgage recast, the process is much quicker since the lender isn’t underwriting a new loan.
No closing costs: Getting a new mortgage can include expensive closing costs. This often dilutes the savings from the lower interest rate. Aside from a small fee (usually around $250 to $500), there are no additional costs to recast a mortgage.

Cons

You cannot lower your interest rate: If current rates are lower than your existing mortgage rate, you cannot lower the rate through a mortgage recast.
Cannot withdraw equity from your home: A mortgage recast uses your existing balance. It doesn’t allow you to pull any equity from your home like a cash-out refinance does.
Not all loans are eligible for a mortgage recast: Many lenders do not offer them at all and, for those who do, some loans are not eligible. For example, FHA, VA and USDA loans may not be recast.
Restrictions on eligibility: Some lenders place restrictions on mortgage recasts. They can be based on how much you owe, how much you’ve reduced your balance and if you’ve made your payments on time.
More money tied up in equity: By paying extra to reduce your mortgage balance, you have more money tied up in your home. The only way to access this equity is to sell the home or take out a new loan. This can be through a cash-out refinance, home equity loan or home equity line of credit.

Is a Mortgage Recast Right for You?

A mortgage recast may make sense if you’ve paid down your mortgage balance quickly and would like to have lower monthly payments. Lower payments reduce your debt-to-income ratio, which can make it easier to qualify for other loans. It also frees up cash on a monthly basis.

This strategy is also popular among homeowners who have purchased a new home but have yet to sell their previous home. The recast mortgage on the old home can make it easier to juggle two mortgages until one is sold. It may also enable them to convert the home into a cash-flowing rental property.

When to Consider Refinancing Instead

While a mortgage recast can lower your monthly payments without extending your loan term or changing your interest rate, there are situations where the benefits of refinancing may offer greater long-term value. If current mortgage rates are significantly lower than the rate on your existing loan, refinancing could reduce your interest cost over the life of the loan.

For example, replacing a 6% mortgage with a 4.5% rate could lead to substantial savings—even if the monthly payment change is similar to what you’d achieve through a recast.

Refinancing may also allow you to adjust your loan structure. You can change from an adjustable-rate mortgage to a fixed-rate mortgage to lock in a stable rate, or shift from a 30-year term to a 15-year term to pay off the mortgage faster and pay less interest overall. Additionally, a cash-out refinance can give you access to home equity to fund large expenses, such as home improvements or debt consolidation. These are benefits a recast cannot provide.

However, refinancing comes with upfront costs and more paperwork. You may pay 2% to 6% of the loan amount in closing costs, and the process requires a credit check, full income verification and potentially a home appraisal. Refinancing may be less appealing if you plan to sell your home soon or if your credit score or income situation has changed unfavorably.

Comparing both options—refinance vs. recast—based on your loan terms, financial goals and expected time in the home can help determine the better fit. Consulting with a financial advisor or mortgage specialist can help you weigh the potential savings and tradeoffs.

Bottom Line

A mortgage recast is an attractive strategy for homeowners who are ahead on their payments.

A mortgage recast can lower your monthly mortgage payment by recalculating payments after you make a substantial lump-sum contribution toward the principal. It may be a relatively low-cost alternative to refinancing, particularly if you want to keep your existing interest rate, but eligibility depends on your loan type and mortgage servicer. Before recasting, consider whether putting extra cash toward your mortgage makes more sense than maintaining liquidity, paying off higher-interest debt or investing toward other financial goals.

Tips on Mortgages

Figuring out where to apply the savings from a mortgage recast for maximum benefit can be a challenge. A financial advisor can walk you through various scenarios to help you decide how to allocate the extra money. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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