Mortgage recasting: What it is and how it works

A mortgage recast involves paying a large sum toward your principal balance in an effort to reduce your monthly payments. After applying the extra money to the principal, your lender will reamortize the new balance over the remaining years on your loan. Mortgage recasting can be a good strategy if you’re interested in making your monthly payments more affordable but don’t want to refinance.

What is a mortgage recast?

Mortgage recasting is a form of prepaying your mortgage. To recast your loan, you’ll make a lump-sum payment toward the principal balance. Your lender will then reamortize the loan with the smaller balance and new, lower monthly payments. Although your loan has been recast, you’ll retain the same interest rate and loan term.

Not all types of mortgages qualify for recasting in the standard sense. You can’t typically recast an FHA loan, VA loan or USDA loan — although your lender might use the recasting method to modify your loan if you’re struggling to pay.

Your lender might require you to reduce your balance by a minimum amount in order to recast it. Most, if not all, lenders require you to be in good standing with payments.

Mortgage recasting vs. refinancing

There’s a big difference between recasting a mortgage and refinancing one, even though both can help you save money. Here’s how they compare:

• Refinancing a mortgage: Refinancing requires that you apply for a brand-new mortgage and pay closing costs. The new loan pays off your existing loan, giving you a new mortgage with a new interest rate. Borrowers typically refinance to get a lower interest rate, go from an adjustable-rate mortgage to a fixed-rate mortgage or do a cash-out refinance of some of the equity in their home.
• Recasting a mortgage: Recasting allows you to keep your existing loan, but adjusts the amortization. You can’t get a lower interest rate or a shorter loan term with recasting, but if your interest rate is already low — or at least lower than prevailing rates — then you lose much of the advantage of refinancing. In that case, a loan recast might be preferable to a refinance because it allows you to keep your current rate.

Mortgage recasting vs. making principal payments

Mortgage recasting differs from simply making principal payments mainly because the former reamortizes your loan. When you make extra principal payments, you’re chipping away at your loan balance, but on your original amortization schedule. These extra principal payments likely aren’t as large as the lump sum you’d pay to recast your loan, either. You can use Bankrate’s mortgage payoff calculator to see how making extra payments can impact your loan.

How does recasting a mortgage work?

Recasting your mortgage doesn’t mean you’ll pay your mortgage off early. Your new payoff schedule matches what it would have been originally but with each monthly payment adjusted to reflect the new balance.

Unlike making extra mortgage payments, recasting your mortgage involves:

1. Contacting your service to determine eligibiity
2. Completing paperwork
3. Making a lump-sum payment and paying the recast fee

How to qualify for mortgage recasting

You’ll need to meet certain qualifications to be eligible to recast your mortgage. These include:

• You can’t have a government-backed loan. You can’t recast an FHA, VA or USDA loan.
• You must meet minimum principal reduction requirements. Most lenders require a minimum lump sum in order to recast the loan.
• You might need to meet an equity requirement: Your lender might require a certain amount of equity in your home to qualify.
• Your loan must be in good standing. Typically, lenders will recast your loan only if you have a history of making payments on time.

How to calculate your mortgage recast

You can estimate your new monthly payment after the recast with the help of our amortization schedule calculator.

Say, for example, your 30-year mortgage carries a balance of $200,000 at a 5 percent interest rate. The monthly payment is $1,074 (excluding escrow payments).

After 10 years, your outstanding mortgage balance is $162,684. You then decide to make a $50,000 lump sum payment to recast the loan, plus pay a $250 recasting fee. That reduces the balance of your loan to $112,684. Your monthly payment for the next 20 years will drop to $744, which is $330 less than your original payment.

FAQ

• Should you recast your mortgage?

  A mortgage recast might make sense if you have enough money to do it, but you shouldn’t recast your loan if you need the funds for other purposes. If you don’t already have an emergency fund, for example, start there.

  In addition, think through your future financial needs. If you plan to retire in a few years, a loan recast can help you keep expenses low when you’re on a fixed income. Similarly, if you’re planning to take a pay cut to pursue a new career path, recasting can help make your budget more manageable.

  Before you commit this lump sum to your mortgage, explore all of your options. You might want to talk to a financial advisor; investing that money might be a smarter move, especially if you have a low interest rate on your mortgage.

• How soon can you recast your mortgage?

  This varies from lender to lender — and remember, some lenders don’t allow for a mortgage recast at all. Generally, you’ll need to have made several months of on-time payments to recast your mortgage. In some cases, this might be as short as six months.

• What are alternative ways to save on your mortgage?

  To save on your mortgage, consider refinancing if you can get a lower interest rate, getting rid of private mortgage insurance (PMI), making additional payments or — in cases of financial hardship — requesting a home loan modification.

• How much does it cost to recast a mortgage?

  You can expect to pay anywhere from $150 to $500 to recast a mortgage. The cost of recasting a mortgage is typically much cheaper than refinancing a loan, which can cost between 2 and 5 percent of the new loan amount.

• Can a recast get rid of PMI?

  Yes, recasting your mortgage can help you get rid of PMI. You can drop PMI if recasting your mortgage reduces your loan balance to 80% or less of your home’s value.

• How long does a mortgage recast take?

  From start to finish, the process of recasting a mortgage takes roughly 45 to 60 days. During this time, you’ll continue to pay your normal mortgage payment. Once you receive the new amortization schedule, your new monthly payment will take effect.