Recasting your mortgage can lower the cost of your monthly mortgage payments. But even though a recast makes ongoing payments more affordable, it's not really a savings hack. For a mortgage recast, you have to make a hefty lump sum payment to adjust the amount of your principal. Here's what you should know about mortgage recasts.
What is a mortgage recast?
A mortgage recast can feel sort of like making a second down payment on your home. When you recast your mortgage, you pay your servicer a lump sum — the company may require $10,000 or more. The servicer then uses an amortization schedule to recalculate your monthly payments based on the new, lower principal amount. Because you'll now be paying less money over the same amount of time, your monthly costs should be lower.
Here's an example: Let's say that when you bought your home, you took out a 30-year loan for $360,000 at 6% interest. Your monthly principal and interest is about $2,158. Now it's 10 years later, and you've got a little over $300,000 remaining on the loan when you receive an inheritance and decide to recast. You make a $60,000 payment, bringing the principal to about $249,000. Once your lender reamortizes that principal amount over the 20 years remaining on your loan (and still at that 6% interest rate), your monthly P&I will drop to $1,719, saving you $439 each month.
Unlike in a mortgage refinance, you don't get a new loan when you recast. That can make a mortgage recast advantageous if your interest rate is significantly lower than current mortgage rates. Refinancing can also be used to lower your mortgage costs, particularly if rates have dropped since you got the loan. But because a refinance replaces your existing mortgage with a new loan, if rates have gone up, your refinanced mortgage's rate will be higher.
When does a mortgage recast make sense?
A mortgage recast could be a good call if you want to reduce your mortgage costs while keeping your current home loan more or less intact — and you've got the cash to make a sizable principal payment.
The most common reason for recasting is if you've bought a home but not yet sold your previous one. Once your previous home sells, you can use some of the proceeds to bring down the cost of the new mortgage.
You could also recast if you've received a financial windfall from an inheritance, a bonus or an investment distribution. But before committing to using those funds for a recast, consider talking with a financial planner to weigh the benefits against other money moves you might make.
If you need to lower your mortgage payments because you're having trouble paying your home loan, you have other options. Mortgage forbearance can help with temporary setbacks; if it's a permanent change, your lender may offer a loan modification. Reamortizing the loan amount over a longer period is one strategy that may be used to modify a loan.
Mortgage recast requirements
In addition to that lump sum payment, your lender or servicer will ask you to meet other requirements in order to recast your loan. Some of these can vary by lender, so you'll want to inquire about what's needed.
Lump sum. Mortgage recasts come with a high price tag, so that's worth repeating. You'll have to meet a minimum requirement for principal reduction, generally in the thousands, to recast your loan.
Loan type. Government-backed loans — FHA, VA and USDA loans — are not eligible for mortgage recasts. Conventional loans can be recast. If you have a different loan type, like a jumbo loan, your servicer may set their own rules.
Equity. Your lender may also require that you have a certain amount of home equity in order to recast. Equity is the amount of your home you own outright; take the home's current value minus what's left on the mortgage to calculate equity.
Payment history. A record of on-time mortgage payments is essential, though in some cases this may be as brief as one or two payments. That's helpful if you're trying to recast the loan on a home you recently purchased.
Benefits of recasting a mortgage
There can be numerous benefits to a mortgage recast versus a refinance, though without a home sale or other source of ready cash, the lump sum payment is a major obstacle.
Lower payments. A mortgage recast brings down your monthly payments — after, of course, you make that super-sized lump sum payment.
Less paperwork. You won’t need a credit check or an appraisal to recast, making it a simpler option than refinancing.
No closing costs. You'll generally pay a fee to recast your mortgage, but that's usually in the hundreds of dollars. In contrast, refinance closing costs can be 2% to 6% of the refinanced amount. Yes, you're making the lump sum payment, and that's a gigantic chunk of change, but it's going toward your loan, not to paying for an appraisal, an origination fee or the other costs associated with refinancing.
Keep your mortgage. Unlike with a refinance, you aren't getting a new loan. If you've got a low interest rate, a recast lets you retain it even if prevailing rates have gone up.
Disadvantages of recasting a mortgage
Again, besides that initial lump sum payment! Here are the cons to consider before you ask about a recast.
Not all lenders offer recasts. Pretty much any mortgage lender will refinance your loan, but not all lenders and servicers will do recasts. Since recasts don't tend to be advertised, you'll have to ask whether it's an option.
Making extra payments might be good enough. If your servicer allows you to pay excess principal, you could potentially bring down your loan amount over time instead of with a lump sum. Though you wouldn't be lowering your monthly payments — quite the opposite — you'll take months or even years off of your mortgage's term. An amortization calculator could help you compare the total interest you'd pay with a recast versus paying extra each month.
No change to interest rate. Yes, if rates are higher than they were when you bought, this is an advantage. But if prevailing rates are lower, or if your finances have improved such that you'd qualify for a better interest rate, a refinance might make more sense.
