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What is mortgage recasting? (2023)

Reduce your mortgage payment without refinancing

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Refinancing is not always the best option, especially when interest rates are high or lender requirements are too strict. Mortgage recasting is another financial strategy for borrowers looking to reduce their monthly mortgage payments.

“Mortgage recasting, aka loan recasting, is where you agree with your mortgage lender to make a lump-sum payment toward your principal balance, and the lender then reamortizes the remaining balance over the existing loan term,” explained Daniel Kerr, a senior financial advisor at Running Point Capital in El Segundo, California.

“This means your monthly payments are adjusted based on the reduced principal balance, usually resulting in lower monthly payments.”

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

Kerr said that not all lenders will recast a mortgage, and if you have a FHA, VA or USDA loan, recasting is not an option either.

“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,” he 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

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).

Loan balance $270,000 $240,000
Monthly payment $1,408 $1,250
Interest paid over the loan term $237,236 $211,118
Interest savings $25,847

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 just 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 the interest rate. It only reduces the remaining principal balance. A refinance, on the other hand, 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.

» MORE: How soon can you refinance a mortgage?

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 save on interest. Check with your lender to make sure there isn’t a prepayment penalty.

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 ultimately save thousands on interest charges, too.

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 (PMI) 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.

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    How much does a mortgage recast cost?

    Kerr said there is usually a small fee of about $250 for a mortgage recast. This is a small cost compared to refinancing closing costs, which range from 2% to 6%.

    How many times can I recast my mortgage?

    It depends on the lender, but some don’t have limits on the number of times you can recast your loan. Also, some lenders will not recast mortgages that have prior modifications.

    How will I know if I am eligible for mortgage recasting?

    Ask your lender if it offers mortgage recasting. Those that do have specific requirements for qualification. Some government-backed loans, like FHA or VA loans, generally don’t qualify for a loan recast.

    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.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Experian, “Mortgage Recasting vs. Refinancing: Which Is Better?” Accessed Aug. 22, 2023.
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