What Is Mortgage Recasting?

When is mortgage recasting the right choice?

Mortgage recasting might be a good choice for you if you can afford to make a large, lump-sum payment toward your principal and you don’t have other, higher-interest debt to pay off. You might consider a mortgage recast if the following scenarios apply to you:

• You’ve recently received money from the sale of another property and want to put that money toward your current mortgage
• You received a large financial gift or inheritance
• You received a substantial bonus from your job

Because recasting your mortgage doesn’t change its interest rate and term length, it could be a good option if you’re satisfied with your current loan terms.

Before you commit to recasting your mortgage, crunch the numbers and make sure that your lump-sum payment would be large enough to make a noticeable difference. Because you and your lender would need to agree on mortgage recasting, it can help you weigh whether a recast is a good fit for your situation and determine if you meet any qualification requirements the lender may have.

How to recast a mortgage

Not all lenders will recast a mortgage, and recasting is also not an option if you have a FHA, VA or USDA loan.

“To qualify for a recast loan, you'll likely need to meet specific equity and principal reduction standards, your payment history could affect your options and there may be restrictions regarding how much you owe, how much you've paid and your payment history,” Kerr said.

“If allowed by your lender, generally you will need to provide a lump-sum payment of at least $20,000, although lenders may require as much as $50,000 or as little as $5,000.”

Mortgage recast example

Let’s 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 mortgage 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; in this example, that’s 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.

Jeffrey from North Carolina planned to do this. “I agreed on the minimum down payment required to move forward and then do a recast,” Jeffrey said, thinking he could recast right after closing. They ultimately had to wait two payment cycles, so always check with your lender ahead of time, as requirements vary.

» MORE: Complete checklist of mortgage refinance requirements

Recasting vs. refinancing

A recast does not change the end date of the loan or its interest rate; recasting only reduces the remaining principal balance.

A refinance, on the other hand, is essentially starting a new loan with different terms. With a refinance, you must 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 recalculates your monthly payment, while refinancing means taking out a new loan.

Often, borrowers choose to refinance when interest rates are low so they can 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.

Fees are another key difference between a recast and a refinance. A recast generally has lower fees, between $200 and $300. With a refinance, the borrower has 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.

» MORE: How soon can you refinance a mortgage?

Recasting vs. paying down principal

You can make a one-time payment on your principal without recasting your mortgage. No amortization or restructuring of the loan occurs in this situation, which means your required monthly payment will stay the same. However, you would pay off the loan sooner than expected and save on interest. You should check with your lender to make sure there isn’t a prepayment penalty before you do this, though.

Let’s 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 will ultimately save thousands on interest charges, 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 on interest charges 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. Depending on many variables, it’s possible that you could make more money investing those funds than you end up saving in interest on your mortgage.

On the flip side, there are advantages to recasting. Making that 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 get a boost from 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, such as credit card balances.

FAQ

Bottom line

“Recasting tends to make sense when three aspects of your situation align: you have a lump sum of money to reduce your principal balance, you are satisfied with your current interest rate and loan terms and you want to lower your monthly payments without changing other aspects of your mortgage,” said Kerr, adding that recasting makes more sense when interest rates are high and you want to keep your low rate.