Everything You Need to Know About Recasting a Mortgage
Recasting a mortgage is an effective way to save money on loan payments by making lump sum payments toward the principal.
Written by Heather Bernhard
Reviewed by Melanie Reiff
A mortgage recast is when a borrower makes a lump sum payment towards the principal balance of their mortgage and the lender reamortizes the loan with a new, lower balance.
The recasting process can save homeowners money by lowering their monthly mortgage payments. Unfortunately, mortgage recasts aren’t offered by all lenders—and even if yours does offer it, it may not be the right choice for you.
To explain the process,
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What is mortgage recasting?
A mortgage recast (or loan recast) is when you make a lump sum payment towards the principal balance of your
mortgage
loan. The lender then recalculates your payments based on the new, lower balance. Typically, lenders require a payment of at least $5,000. Most lenders also charge a service fee to recast a mortgage. The cost isn’t usually more than a few hundred dollars, though you’ll have to check with your lender for specifics.
Once you make the payment, they will reamortize (or recalculate) your loan. The term (or length of time you pay) and the interest rate will stay the same, but the monthly payments will be lower.
When does it make sense to recast?
Recasting a mortgage makes sense when you have a large sum of expendable income that you can use to make a lump sum payment towards your mortgage loan.
For example, Individuals often use a mortgage recast to lower the loan payments on a new home after selling their previous property. This is only possible, of course, when they buy a new house before selling their old one.
Later, when they sell their previous home, they can use the proceeds to make a lump sum payment towards a mortgage recast. The recast lowers the overall amount owed on the new mortgage and, in turn, reduces the monthly payments.
Recasting is also an option for homeowners who come into a large sum of money. For example, someone who gets a significant bonus at work or receives an inheritance may use those funds to recast their mortgage.
Pro Tip Paying a recasting service fee is usually worth it since the process usually saves borrowers thousands of dollars over the life of the loan.
Mortgage recasting requirements and availability
Many lenders don’t offer mortgage recasting. So before you get your hopes up about lower monthly payments, check with your lender to make sure it’s possible.
Large banks and lending institutions, such as Wells Fargo or Quicken Loans, usually offer mortgage recasts—but not on all of their products. Only conventional mortgage loans are eligible, not those backed by the government. That means you cannot recast loans like an FHA or USDA.
To qualify for mortgage recasting, the lender might consider your payment history. In addition, you’ll likely need to meet specific principal reduction standards; many lenders require that you pay off at least $10,000 in principle before you qualify for recasting.
How to calculate your mortgage recast
To calculate the terms of your mortgage recast, you will need to know the remaining balance of your loan, the interest rate, and how many months are left in your contract.
For example, say you have 20 years and $175,000 left on your mortgage at a 4% interest rate. Your payments would be $1,060 a month.
If you make a $15,000 lump sum payment, the principle will drop to $160,000. This would reduce your monthly payments to $970 a month.
The easiest way to determine your new rate is to use an online mortgage calculator. There are dozens of free options available online.
Pro Tip The larger the lump sum payment, the more your monthly payments will drop.
Differences between mortgage recasting and refinancing
When you recast a mortgage, the only thing you’re doing is changing your monthly payment. The interest, term, and remaining equity do not change.
However, when you
refinance your home
, you apply for an entirely new mortgage to get better terms. The new mortgage will likely have a different interest rate and payment terms, but you may lose equity depending on the type of loan. If you need help understanding the differences between the two, this table might help:
Recasting | Refinancing | |
|---|---|---|
Will your interest rate change? | No | Possibly, it depends on your new terms. |
Does it require a credit check? | No | Yes, typically a score of at least 640 is required to refinance. |
Does it require proof of income? | No, you usually do not need to show proof of income for a recast. | Yes, you will need to show proof of income and other financial records. |
Will it lower your monthly payment? | Yes | Yes |
Are all mortgages eligible? | No, you cannot recast government-backed loans. | Yes, you can refinance virtually all mortgages. |
Will your loan term change? | No, the length of time you pay remains the same. | Yes, you can usually choose between a standard 15 or 30-year term. |
Do you need to make a minimum down payment? | Most lenders require a lump-sum payment of at least $5,000. | No, refinances typically don’t require a down payment. |
Do you need to pay closing costs? | There’s typically an administrative fee of a few hundred dollars. | Yes, closing costs amount to 2% to 5% of the loan. |
Pro Tip If current interest rates are lower than when you first got a mortgage, refinancing might be a better choice. With a recast, you keep the same interest rate, but with refinancing, you typically get the current market rate.
Is a mortgage recast right for me?
To decide if recasting your mortgage is the right move, consider what you want to get out of your loan.
If you want lower monthly payments without the hassle of applying for a new loan, then a recast is probably a good idea. If you’re hoping for a lower interest rate or different mortgage terms, refinancing would be the better bet.
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FAQs
What’s the difference between a mortgage recast and a principal payment?
A mortgage recast is, essentially, a large, lump-sum, principal payment. It lowers the overall amount owed on the loan but does not change the interest rate or term. If you’d like to pay your mortgage off sooner than expected, you can continue to pay extra towards the principal each month.
How soon can you recast a mortgage?
Most mortgage lenders will allow you to recast your loan after just two months, during which you make regular, on-time payments.
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