What is mortgage recasting?

If you’re a homeowner who wants to reduce your monthly payment, you’ve likely heard about refinancing. Refinancing can be a good option when interest rates are lower than they were when you got the mortgage. But in times when interest rates are rising, you might want to consider a mortgage recasting — where a lender recalculates your monthly payments based on the remaining balance and loan term.

Key insights

• A loan recast can help lower your monthly mortgage payment and save you interest.
• A recast doesn’t change things like interest rate and term length.
• Some government-backed loans like FHA and VA loans don’t qualify for recasting.

How to recast a mortgage

A mortgage recasting occurs when the lender agrees to reamortize your mortgage loan in exchange for a substantial, one-time payment toward the principal. Your loan terms — like interest rate and term length — won’t change, but you will end up with a lower monthly payment. Generally, borrowers choose to recast their mortgage if they receive a large sum of cash, usually from the sale of another property.

Here’s how a recast works: Say you owe around $270,000 on a 30-year mortgage loan you started a few months ago. Your interest rate is locked in at 4.75%, and your principal and interest payment is currently $1,408. You recently sold your previous residence and earned proceeds from the sale that total $30,000.

If you decide to do a mortgage recast, you can put that $30,000 toward a one-time principal payment to reduce your loan balance. Now the loan balance is approximately $240,000, and your monthly payment may be around $1,250. Not only will you reduce your monthly payment by about $150, but you’ll also pay much less in interest over the life of the loan (a savings of approximately $25,500).

Homeowners closing on the purchase of a new home before the sale of their old home often recast after the sale goes through, putting some of the profits from the sale toward lowering the principal on their new loan. A reviewer on our site from North Carolina planned to do just this: “I agreed on the minimum down payment required to move forward and then do a recast,” they said. They did have to wait two payment cycles, so always check with your lender ahead of time, as requirements vary.

Do all lenders do mortgage recasting?

Not all lenders offer mortgage recasting. Those that do offer recasting have specific requirements for qualification. Some government-backed loans, like FHA or VA loans, generally don’t qualify for a loan recast.

Typically, to recast a mortgage you’ll need to make a principal payment of $5,000 or more (though some lenders don’t require a minimum payment). The principal payment requirement may also be expressed as a percentage of the unpaid loan balance (like 10%). So, if your remaining loan balance is $300,000, the lender may require a principal payment of $30,000 (10% of the unpaid loan balance) to recast the loan.

In addition, you’ll need a short history of on-time payments (some lenders only require a minimum of two monthly payments).

Recasting vs. refinancing

A recast does not change the end date of the loan or the interest rate. It only reduces the remaining principal balance. However, a refinance is essentially starting a new loan with different terms. You’ll have to submit a loan application and allow the lender to conduct a credit check. With a recast, you typically aren’t subject to another credit check.

A recast only recalculates your monthly payment, while refinancing means taking out an entirely new loan.

Often, borrowers choose to refinance when interest rates are low to lock in a lower rate. Refinancing can also extend the loan term. For example, you may currently have a 30-year mortgage that you’ve made payments on for five years. When you refinance, unless you choose a shorter term length like 15 years, you'll restart another 30-year loan term. Reduced interest rates and extended payback periods lower your monthly payment.

Another key difference between a recast and a refinance is the fees. A recast generally has lower fees — between $200 and $300. However, with a refinance, the borrower will have to pay closing costs, which can account for 2% to 6% of the loan principal. On a $200,000 loan, that’s at least $4,000 in closing costs.

Recasting vs. paying down principal

You could choose to make a one-time payment on principal without recasting your mortgage. However, no amortization or restructuring of the loan occurs, which means your required monthly payment will stay the same. You’ll just pay off the loan sooner than expected (and some lenders may charge a prepayment penalty if you do).

For example, say you inherit $50,000, and you want to use it to pay off some of your remaining mortgage balance. If you make a one-time principal payment without recasting, you’ll shave a few years or more off the loan term, but the monthly payment requirement won't change. You’ll still save money in interest, though.

However, if you choose to recast your mortgage, you’ll get a lower monthly payment. This may give you more financial flexibility each month, whether that’s for investing or paying off other debt. You’ll end up saving in interest with a recast as well.

Are there disadvantages to a mortgage recasting?

One disadvantage of a recast is that you’ll tie up more cash in your home, making it less accessible in a crisis than if you deposited it into a liquid account. Also, you lose the opportunity to invest that cash in other ways (like in your 401(k) or other retirement plans). It’s possible that you could make more money investing those funds (depending on many variables) than you end up saving in interest on your mortgage.

On the flip side, there are advantages to recasting. For one, the large principal payment may allow you to drop private mortgage insurance if your loan balance falls below 80% of the home’s original value. Also, your credit score may see a boost due to the lightened debt load. The smaller monthly payment you get with a recast also can give you more room in your budget to pay off high-interest debt, like credit card balances.

Bottom line

A mortgage recast can be a good option if you have the cash to make a substantial principal payment now and want to reduce your monthly mortgage payment. It can save you a great deal in interest without costing a lot in fees. Looking at your loan’s current amortization table and the potential new one can help you decide if a mortgage recasting is right for you.

Before you decide, you’ll want to consider your overall financial situation to see if the funds for recasting could potentially be better used elsewhere. For example, paying off your credit card balances could help you reach your long-term financial goals as much as a lower mortgage payment. Also, keep in mind how much liquid savings you have available for emergencies.