What Is Mortgage Recasting?

What Is Mortgage Recasting?

Mortgage recasting, also known as re-amortization, involves making a large payment toward your principal, which lowers your future monthly payments. Unlike refinancing, recasting doesn't change your loan terms; you keep the same interest rate and make the same number of monthly payments. However, it can make your payments more manageable, freeing up space in your budget each month for other expenses.

How Does Mortgage Recasting Work?

Recasting a mortgage works by making a lump-sum payment toward your loan principal to lower your monthly payments without changing your rate or terms. It's a relatively simple process you can typically complete in a few steps.

1. Make a Lump-Sum Payment

Some lenders have minimum payment requirements, so check with yours to find out how much money you need to complete a recast. Then decide on your payment amount, complete the required paperwork, make your payment and pay the recasting fee.

2. The Lender Re-Amortizes the Loan

The lender will apply the lump-sum payment to the principal balance and re-amortize your loan. Here's an example.

Example: Let's say you got a $400,000 mortgage loan with an interest rate of 5% and a 30-year term when you purchased your home. Before recasting, your monthly principal and interest payment was $2,147.29.

Six months into the loan term, you receive an inheritance that you want to use to reduce your monthly payments. At the time, the remaining balance on your mortgage is $397,086. You make a lump-sum payment of $50,000, bringing the balance down to $347,086.

The lender re-amortizes the loan, dividing the new balance by the number of months left in your loan term, to calculate your new monthly payment, which is $1,876.91, saving you $270.38 per month.

3. Lower Monthly Payments Begin

When your lender completes the mortgage recast, you make the new, lower monthly payments for the remaining loan term.

Mortgage Recasting vs. Refinancing

Both recasting and refinancing your mortgage can help you reduce your monthly payments. The option that's best for you depends on the type of loan you have, your interest rate and what you hope to achieve.

Mortgage Recasting

Recasting your mortgage tends to be simpler and more cost-effective than refinancing, but not all lenders allow it, and it isn't available for all loan types. Because recasting doesn't change your loan agreement, there's no impact to your credit scores, and your interest rate and loan term remain the same. If you're paying private mortgage insurance (PMI) because you put less than 20% down when you bought your home, recasting can help you eliminate PMI.

Mortgage Refinancing

You can generally refinance almost any type of mortgage. However, because refinancing replaces your existing loan with a new one, you must go through the application process all over again. You'll have to pay closing costs, which typically run 2% to 6% of the loan amount, and the lender will conduct a hard credit inquiry, which may temporarily reduce your credit scores by a few points.

Unlike a recast, you don't have to pay down your principal balance to refinance, but it will alter the terms of your loan, which may be worth it if you can qualify for a lower interest rate or want to tap the equity you've accumulated.

Learn more: When Should You Refinance Your Mortgage?

Who Qualifies for Mortgage Recasting?

Not all loans qualify for mortgage recasting. Here are some of the factors that determine eligibility.

• Lender: Some lenders allow borrowers to recast their mortgage, and others don't.
• Loan type: Government-backed loans, including loans guaranteed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA), don't usually qualify for recasting.
• Payment history: You generally need to show that you have made your payments on time to qualify for a recast.
• Equity: You may need to accumulate a specific amount of equity to be eligible for a recast. Policies vary by lender.
• Payment amount: Some lenders require you to make a minimum lump-sum payment to recast your mortgage.

Learn more: How to Recast Your Mortgage

Should You Recast Your Mortgage?

Mortgage recasting may be a good option for homeowners who want to lower their monthly mortgage payment without changing their interest rate or loan term and have a significant sum of money they can put toward their principal. Recasting can be especially helpful for homeowners who settle on the purchase of a new house before selling their old one. It allows you to use the proceeds from the sale of your old home to make your new monthly payments more affordable.

However, if recasting your mortgage will leave you without an emergency fund or cash for other essential expenses, you may want to think twice. Keeping some cash on the sidelines to give you a financial cushion may be a better option. Additionally, if you're seeking a lower interest rate or want to modify your loan term, recasting isn't your best bet.

Learn more: How to Lower Monthly Mortgage Payments

How to Calculate Your Mortgage Recast

Your lender can tell you what your new monthly payment will be once they know the size of your lump-sum payment. Or you can use a mortgage recast calculator to see how recasting will affect your payments going forward. Inputting varying principal amounts with your current interest rate will allow you to see how making different lump-sum payments may affect your future monthly payments.

Frequently Asked Questions

The Bottom Line

Mortgage recasting is a simple, cost-effective way to reduce your monthly mortgage payments without the hassle, cost and credit impact of refinancing. It can help reduce your financial burden each month, leaving room in your budget for other expenses. However, if you're hoping to qualify for a lower interest rate, take advantage of equity you've accumulated or change your loan term, recasting may not be right for you.