For most homebuyers, a mortgage is a 30-year commitment. If your financial situation or goals change at some point during those 30 years, it might be helpful to reduce your payment without changing anything else about your loan.
Mortgage recasting is one way to do that. If you’ve benefited from a recent windfall, such as a work bonus or inheritance, you can use that extra cash to make a lump-sum payment that reduces your mortgage balance and monthly payments.
What is a mortgage recast?
A mortgage recast, or loan recast, is when you make a large, lump-sum payment toward your mortgage principal. Upon making the payment, your lender will re-amortize your mortgage — that is, recalculate your monthly principal and interest payments based on the new, lower principal balance.
Tip:
Nothing changes with a mortgage recast except the payment amount — you’ll get a new amortization schedule, but your interest rate and the number of years remaining on your loan will stay the same.
Some lenders require a minimum lump-sum payment amount before they’ll recast a loan. The minimum varies by lender, but expect to pay at least $5,000. Most lenders also charge a small service fee, such as $250.
Recast vs. refinance
Mortgage recasting differs from refinancing. Here’s a breakdown:
- A mortgage recast is a good choice if you’re satisfied with your current loan term and interest rate, and your financial goals are best met by investing your cash in your home in exchange for a lower payment.
- A mortgage refinance, on the other hand, is an entirely new mortgage that replaces your current home loan — you use the funds from the new loan to repay the old one. Most homeowners will refinance to a lower rate to save on interest costs over the life of their loan.
Tip: Just as you did with your primary mortgage, you’ll have to apply and qualify for the refinance and pay for a home appraisal and closing costs.
While both recasting and refinancing can lower your monthly payment, you might be better off refinancing if mortgage rates are low. Since a loan recast doesn’t change your interest rate, you could end up saving more in the long run by choosing to refinance instead.
Keep in mind, refinancing a mortgage can cost between 2% to 5% of the loan amount so be sure to crunch the numbers to find your biggest savings payoff.
Learn More: Complete Checklist of Mortgage Refinancing Requirements
Recast vs. loan modification
A loan recast and loan modification both reduce your monthly payments, but under different conditions:
- Loan recast: A recast simply recalculates your monthly payments based on the lump sum that you applied to the principal balance; your loan terms don’t change.
- Loan modification: A modification changes your loan terms. Your lender may extend the loan term, reduce the interest rate, and/or reduce the principal balance.
Important:
Depending on the type of modification and the circumstances, modifying a mortgage can damage your credit, come with significant tax liability, and lead to you paying more in interest over the long term.
When to consider a mortgage loan recast
There are a few scenarios when you should consider a mortgage recast:
- Recent windfall: If you recently received a large inheritance or salary bonus, consider applying that windfall to your mortgage principal.
- Higher mortgage rates: People tend to refinance their mortgages to secure better terms and lower their monthly payments, but if interest rates have gone up since you closed your loan, it wouldn’t make sense to refinance. This is when a mortgage recast comes in handy.
- Buying a new home: In a competitive housing market, you might need to make an offer without a home sale contingency. Once you buy the new home and sell your old one, you can recast your mortgage using the proceeds from the sale of your old home and lower your monthly payment.
Good to know: It can take the lender six to eight weeks to recast your loan. You’ll make your regular payments until the recast is complete. Once it’s complete, you’ll see the new payment amount listed on your mortgage statement.
There’s generally no limit on how many times you can make a qualifying lump-sum payment and recast your loan.
Learn More: Biweekly Mortgage Payments: Do They Make Sense For You?
Qualifying for a mortgage recast
Not all lenders recast loans, but larger ones, such as Quicken Loans and Chase, often do.
To qualify for a mortgage recast, you’ll need to:
- Have a conventional loan (VA, USDA, and FHA loans can’t be recast)
- Make a lump-sum payment that meets your lender’s requirements
- Have loans in good standing
- Make at least two payments in a row at your current payment amount
Pros and cons of recasting your mortgage
Lowering your monthly mortgage payment is the main reason to consider a loan recast. But there are also downsides to be aware of.
Pros
- Lower payments: Once you’ve recast your mortgage, you’ll have the same number of payments left on your loan but a smaller balance to repay, so your monthly payment will be lower.
- Save on interest: Mortgage recasting reduces the amount of interest you pay over the remainder of your loan because you’ll be paying it on a smaller principal. A longer remaining loan term will result in greater interest savings because a larger portion of your mortgage payment goes toward interest in the early years of your loan.
- Loan term stays the same: Recasting won’t add years to your loan, nor will it prevent you from paying the loan off early.
- Low cost: You’ll pay a modest fee to recast your loan, but it’ll be much lower than the cost of refinancing your mortgage.
- No credit check or appraisal needed: Because you’re not changing your interest rate or loan term, the lender doesn’t need to check your credit or review an appraisal of your home.
Cons
- Cash tied up in equity: The money you pay to reduce your principal will be inaccessible. That means you’ll have less cash on hand, and less to put toward other investments or unforeseen expenses.
- Interest rate stays the same: If you’re more than a few years into your current loan, it’s possible that you could save more by refinancing into a loan with a lower rate than you would by reducing your principal.
- Not the fastest option: You might save more money in the long run by making an extra payment each month without recasting the loan. In that case, you could shave years off the time it takes to repay your loan.
- Modest payment reduction: As the earlier example showed, it takes a large lump-sum payment to reduce your monthly payment by a significant amount.
How to calculate a mortgage loan recast
The simplest solution for calculating a mortgage recast is to use an online mortgage recast calculator, but here’s a more in-depth explanation of how to calculate it manually.
Say you have 15 years and $100,000 left on your mortgage. With a 4% fixed interest rate, the monthly payment would be approximately $740 (not including taxes and fees).
Now, if you were to make a $10,000 lump-sum payment, the principal balance would drop to $90,000. Recasting the loan so that the remaining 15 years’ worth of payments only need to repay $90,000 would reduce your payments to $665.
That doesn’t seem like much, but $75 per month for 180 months is $13,500 in savings — that’s a 35% return on a $10,000 investment that carries minimal risk.
Is a mortgage loan recast right for you?
Whether or not recasting a mortgage is a good idea depends on your current financial situation and your goals for the future. Consider running numbers through a mortgage loan calculator to see how different options affect the amount of interest you pay and the time it takes to pay off your loan.
Don’t rule out refinancing, either. If your current interest rate is higher than rates on new loans, refinancing could save you more in the long run.
