How Does a Mortgage Recast Work and Is It for You?

A mortgage recast provides a way to adjust your home loan payments without undertaking a full refinance. This process involves making a substantial one-time payment towards your mortgage principal, which then triggers a recalculation of your remaining monthly installments. The primary goal of a recast is to lower your required monthly mortgage payment while keeping your existing interest rate and original loan term intact.

Understanding Mortgage Recasting

This adjustment is not a new loan but rather a modification of your existing one, allowing you to benefit from a lower principal balance. Homeowners often consider recasting after receiving a financial windfall, such as an inheritance, a large work bonus, or proceeds from the sale of a previous home. For instance, if you purchase a new home before selling your old one, proceeds from the sale of the prior residence can be used to significantly pay down the new mortgage’s principal. This strategy helps lower future mortgage expenses and reduces the total interest paid over the life of the loan due to the diminished principal.

Distinguishing Recasting from Refinancing

Mortgage recasting differs significantly from refinancing, despite both options potentially leading to lower monthly payments. Refinancing involves replacing your existing mortgage with an entirely new loan, which can come with a new interest rate, loan term, and a full set of closing costs. Conversely, recasting adjusts your current loan without changing the original interest rate or the loan’s maturity date.

Refinancing typically requires a comprehensive credit check, income verification, and often an appraisal, similar to when you first obtained your mortgage. These steps can be time-consuming and expensive, with closing costs ranging from 2% to 6% of the new loan amount. In contrast, recasting generally bypasses these requirements, involving a simpler process with significantly lower administrative fees, often in the range of $150 to $500. The purpose also varies: refinancing is often pursued for a lower interest rate or to access home equity, while recasting is specifically for reducing monthly payments after a principal reduction.

Applying for a Mortgage Recast

Before applying for a mortgage recast, it is important to understand the typical eligibility criteria and required information. Most lenders limit recasting to conventional loans, meaning government-backed mortgages, such as FHA, VA, and USDA loans, are generally not eligible. Lenders usually require a minimum lump-sum payment to the principal, often ranging from $5,000 to $10,000, though some may accept a percentage of the principal balance. Furthermore, borrowers often need a history of on-time payments and may be required to have a certain amount of equity in their home.

To initiate the process, you should contact your current mortgage servicer to confirm if they offer recasting and what their specific requirements are. They will typically provide a form to complete and will request the required documentation, such as proof of funds for the lump-sum payment and your mortgage account details. After submitting the necessary paperwork and making the lump-sum payment, you will typically pay a small administrative fee, which can range from $150 to $500. It is important to note that making the payment does not guarantee approval, and you might need to sign a recast agreement once approved.

What Happens After Recasting

Once your mortgage recast is complete, the most immediate and noticeable change will be a lower monthly mortgage payment. This reduction occurs because your principal balance has decreased, but your loan’s original interest rate and maturity date remain the same.

You will receive a new payment schedule reflecting the recalculated monthly amount. While your monthly payments are reduced, the overall length of your mortgage remains unchanged from its initial term. The entire recasting process typically takes approximately 45 to 90 days from application to the implementation of the new payment. During this waiting period, it is important to continue making your regular, higher payments until you receive your first billing statement with the new, lower amount.