Mortgage management is one of the largest financial liabilities most individuals assume during their lifetime. The biggest concern among many homeowners is how to save on the monthly payment and how to reduce the cost of interest over a long time period. A Recast Mortgage is one of the ways to help.
Recast mortgage is not a common term like refinancing; it can be a good method to make your mortgage more manageable when you have some spare funds. Here, we are going to tell you all you require to know about the process of recasting a mortgage, how recasting can work, and who can benefit, as well as what other options are available to you.
We will cover:
- What a mortgage recast is
- How the process works
- When people use recasting
- The step-by-step process to recast your loan
- Benefits of mortgage recasting
- Things to consider before moving forward
- Alternatives like refinancing or making extra payments
By the end, you’ll have a clear understanding of whether a mortgage recast is right for you.
What Is Meant By a Recast Mortgage?
Mortgage recast involves a homeowner paying a large amount of money as a lump sum to their mortgage principal, and thereafter the lender recalculates their payment schedule on the basis of the new balance.
Here’s the key:
- There is no change in the interest rate of your loan.
- Neither does the loan term (the remaining years to the mortgage).
- The only difference will be that your monthly payment will be less since the balance of your principal will be less.
- To put it simply, a mortgage recast is a kind of reset button on your mortgage balance. You make a hefty deposit, and the financial institution will replace the higher loan amount with a lower monthly payment.
How is Mortgage Recasting?
Mortgage recasting is a simple process.
- You pay a lump sum payment to clear the outstanding balance.
- Your lender then reamortizes the loan. This means they recalculate your monthly payments using the same interest rate and loan term, but with the smaller principal.
- You receive a new amortization schedule or mortgage recast calculator, showing how much of each future payment will go toward principal and interest.
For example:
- Suppose you owe $250,000 on your mortgage at a 4% interest rate with 20 years left.
- You receive an inheritance of $50,000 and decide to apply it to your mortgage.
- After the recast, your new balance is $200,000, and your monthly payment drops because you are paying interest on a smaller loan.
Your interest rate and the final payoff date stay the same, but your monthly expenses become more affordable.
When Is Mortgage Recasting Used?
Recasting is most useful when you have a large sum of money available. Common situations include:
- Inheritance: You receive money from a family member and want to use it to lower debt.
- Work bonus or settlement: A significant one-time payment gives you extra funds.
- Selling a previous home: If you bought a new home before selling your old one, you can use the proceeds from the sale to recast your mortgage.
- Windfall gains: Lottery winnings, investment returns, or other unexpected income can also be applied.
Keep in mind: Many lenders require at least a few months of on-time mortgage payments before allowing a recast.
Steps To Recast Your Mortgage
If you are interested in how to recast a mortgage, we have the answer. The process is usually simple but requires lender approval. Here are the steps:
Step 1: Contact Your Lender
Not all lenders offer mortgage recasting. Start by asking if your loan qualifies.
Step 2: Check Eligibility
Even if your lender allows recasting, they may have rules such as:
- A minimum lump sum payment (often $10,000 or more).
- Proof of a strong payment history.
- Having a loan type that qualifies (most conventional loans are eligible, but FHA, VA, and USDA loans usually are not).
Step 3: Review the Proposal in Writing
Your lender will provide a new amortization schedule showing your future payments. They will also outline any fees.
Step 4: Make the Lump Sum Payment
Once everything is clear, you make the payment along with any recasting fees.
Step 5: Start Paying Lower Monthly Payments
The lender recalculates your loan, and you begin making reduced monthly payments under the new schedule.
A Few Benefits of Mortgage Recasting
A mortgage recast can provide several financial benefits. Let’s go over them one by one.
1. Lower Monthly Payments
The most apparent advantage is that you pay less every month on a mortgage bill. A smaller principal balance lowers your monthly commitment, which will allow you to have additional space in your budget.
2. Save on Interest Over Time
Even though your interest rate does not change, your overall interest cost will be lower since you will be paying interest on a smaller loan amount.
3. Possible Removal of Mortgage Insurance
When the amount of your lump sum payment raises your home equity to 20 percent or more, you can be eligible to drop private mortgage insurance (PMI). This will save you hundreds of dollars every month.
4. No Credit Check Required
Recasting is not associated with a new credit check, as opposed to refinancing. You can re-cast your credit score as long as you satisfy the requirements of the lender, even though your credit score has gone down.
5. Simple and Low-Cost Process
It is far easier than refinancing, and the fee is usually only a few hundred dollars as opposed to thousands in closing costs when refinancing. When your teens learn to earn money online, a mortgage recast will help them get a head start.
Important Considerations Before Recasting a Mortgage
While mortgage recasting has clear advantages, there are some important things to consider.
1. Costs Involved
Most lenders charge a small fee (around $150 to $500) for recasting. While this is minimal, it’s important to make sure the savings are worth the expense.
2. Loan Type Restrictions
Government-backed loans like FHA, VA, and USDA do not allow recasting. Only certain conventional loans qualify.
3. Large Lump Sum Required
If you don’t have at least $10,000 or more to put toward your loan, recasting may not be an option.
4. Alternative Uses for the Money
Ask yourself: Is this the best use of my lump sum? For example:
- If your mortgage rate is 3% but you could invest your money at a 6% return, investing may make more sense.
- If you plan to move soon, lowering your monthly payment for only a short time may not provide enough benefit.
Alternatives To Mortgage Recasting
If recasting doesn’t seem like the right fit, there are alternatives.
1. Making Additional Payments
You can always make extra payments toward your principal without recasting. This helps you pay off the loan sooner, but your monthly payments stay the same.
2. Mortgage Refinancing
Refinancing replaces your current mortgage with a new one. This allows you to:
- Change your interest rate (often to a lower one).
- Adjust your loan term (shorter or longer).
- Possibly lower your monthly payment even without a lump sum.
However, refinancing has downsides:
- Higher costs (closing fees are usually 2-5% of the loan).
- Requires a credit check and a full application process.
Recasting vs. Refinancing vs. Extra Payments
Here’s a simple comparison to help you see the differences:
| Feature | Recasting | Refinancing | Extra Payments |
| Interest Rate Changes | No | Yes | No |
| Loan Term Changes | No | Yes | No |
| Monthly Payment Reduced | Yes | Yes | No |
| Credit Check Required | No | Yes | No |
| Cost | A few hundred dollars | 2-5% of the loan amount | None |
| Best For | Homeowners with a lump sum and a low rate | Homeowners who want a new rate/term | Homeowners who want to pay off faster |
The Bottom Line
A recast mortgage is also a good solution to lessen the monthly mortgage payments and save the overall interest cost without the inconvenience of going through the refinance process. It works simply enough: pay a lump sum, a little fee, and then pay less for the remainder of your loan term.
But it is not something that everyone has, and it does not make much sense unless you have enough additional money to do something about it. The benefits of recasting should be compared to alternative solutions to decisions, such as refinancing or making extra payments, before making a decision.
As per Net Income Zone, a mortgage recast may be the best option when you have the money and you desire to reduce your monthly payment as your highest priority.
FAQs
1. Can I recast my mortgage more than once?
Yes, some lenders allow more than one recast, but it depends on their rules. You will need to ask your lender if they will let you do it again and if there are any limits.
2. Does a mortgage recast change my loan term?
No. A recast only lowers your monthly payment. The number of years left on your loan stays the same.
3. How long does it take for a mortgage recast to go through?
Usually, it takes a few weeks after you make the lump sum payment. Your lender will confirm the new payment schedule once it is ready.
4. Do I need to show income proof for a recast?
No. A recast is not like applying for a new loan. You don’t need to show income proof or go through a big approval process.
5. What happens if I sell my home after a recast?
If you sell your home, the recast does not matter anymore. The buyer pays off your loan as part of the sale, just like with any other mortgage.
Michael Adams is a professional finance writer with a focus on tax education, budgeting, and personal finance. His goal is to make income tax topics clear and practical for individuals and entrepreneurs.