Mortgage Recast: What It Is, How It Works

This content has been reviewed and edited by an Investment Advisor Representative working for Global Predictions, an SEC-registered Investment Advisor.

If you're exploring ways to reduce your mortgage payment without refinancing, a mortgage recast might be a consideration. Many homeowners find the idea of adjusting monthly payments appealing without going through the hassle and costs of refinancing, but the concept of recasting is still not widely understood. This guide will explain what a mortgage recast is, how it works, and whether it could be a suitable option for your financial goals.

What Is a Mortgage Recast?

A mortgage recast, also known as loan recasting, is a process where you make a substantial payment towards the principal balance of your mortgage, and the lender recalculates your monthly payments based on the reduced loan balance. The interest rate and loan term stay the same, but your monthly payments go down because the total amount you owe is lower.

Unlike refinancing, a recast doesn't involve taking out a new loan, and the associated costs are typically much lower—usually just a small administrative fee. This can be an attractive option if you have a significant amount of money to apply towards your mortgage.

How Does a Mortgage Recast Work?

To understand the process better, let’s break it down step by step:

• Make a Large Payment: You start by making a one-time, substantial payment towards the principal balance. Most lenders require a minimum amount for a recast, usually between $5,000 and $10,000.
• Request the Recast: After making the payment, you need to formally request the recast from your lender. There is typically a small administrative fee involved, usually ranging from $250 to $500.
• Lowered Monthly Payments: The lender recalculates your remaining balance, resulting in lower monthly payments for the rest of the loan term. It’s important to note that the interest rate and loan term remain the same; only the monthly payment amount changes.

Pros and Cons of a Mortgage Recast

Before deciding whether a recast is the right option for you, it’s important to weigh the pros and cons.

Pros:

• Lower Monthly Payments: A mortgage recast reduces the monthly payment amount, making it easier to manage your budget.
• Lower Cost Compared to Refinancing: Unlike refinancing, which can come with high closing costs, a recast involves only a small fee and does not require requalification.
• No Change to Interest Rate: If you have a favorable interest rate, a recast keeps it in place, unlike refinancing, which could result in a new rate.

Cons:

• Requires a Large Payment: To recast, you need a significant amount of cash available, which may not be feasible for everyone.
• Doesn’t Shorten the Loan Term: While the monthly payments decrease, the overall loan term stays the same. If your goal is to pay off the mortgage faster, a recast may not be the best option.
• Not All Loans Qualify: Some types of mortgages, like FHA and VA loans, typically do not qualify for recasting.

When Does a Mortgage Recast Make Sense?

A recast can be a smart move if you find yourself with extra cash—from an inheritance, work bonus, or the sale of an asset—and you want to reduce your monthly expenses. Some scenarios where a recast might be beneficial include:

• You Want to Lower Monthly Payments: If your goal is to reduce monthly costs while keeping the same interest rate, a recast can help you achieve this without refinancing.
• You’re Happy with Your Current Interest Rate: If you are locked in at a great interest rate, you might not want to refinance just to lower your monthly payments. A recast allows you to maintain that rate.
• You Don’t Want the Hassle of Refinancing: Refinancing can involve a lengthy approval process, credit checks, and significant closing costs. A recast is simpler and more straightforward.

Mortgage Recast vs. Refinancing: What’s the Difference?

It’s easy to confuse a mortgage recast with refinancing, but they are distinct options.

• Refinancing: This involves taking out a new loan to replace your current mortgage, often to secure a lower interest rate or shorter loan term. Refinancing requires going through a new application process, and there are typically high closing costs involved.
• Recasting: With a recast, you’re not replacing your loan. Instead, you’re paying down a portion of your principal, which reduces your monthly payment. There are minimal fees, and the interest rate stays the same.

How to Get Started with a Mortgage Recast

If you’re interested in pursuing a mortgage recast, here’s how you can get started:

• Check with Your Lender: Not all lenders offer mortgage recasting, and some loans may not qualify. Start by contacting your lender to see if it’s an option.
• Confirm Requirements: Make sure you understand the minimum lump sum requirement, the fees involved, and any other terms your lender might have.

Make Your Payment: Once you’re ready, make your lump sum payment towards the principal and formally request the recast.