How Does Recasting a Mortgage Work?

Mortgage recasting offers a method for homeowners to adjust their loan payments without undergoing a full refinancing process. This financial action involves applying a substantial lump sum payment directly to the principal balance of an existing mortgage. Following this payment, the loan servicer recalculates the remaining monthly payments based on the newly reduced principal. This recalculation allows for a lower monthly payment while keeping the original interest rate and loan term intact.

What Mortgage Recasting Means

Mortgage recasting, also known as reamortization or principal curtailment, involves a significant one-time payment that reduces a home loan’s outstanding principal balance. Once applied, the loan servicer re-amortizes the remaining debt over the original term, immediately reducing the monthly principal and interest payment. This differs from simply making extra payments, which accelerate payoff but typically leave the scheduled monthly payment unchanged.

The outcome of a mortgage recast is a lower monthly expense for the homeowner, as the same amount of time is used to pay off a smaller balance. The interest rate and original maturity date of the mortgage remain unchanged, which preserves the existing interest rate and can be advantageous if current market rates are higher than the homeowner’s locked-in rate. The reduction in the principal balance also means less interest accrues over the remaining life of the loan, leading to overall savings.

Qualifying for a Mortgage Recast

Eligibility for a mortgage recast is not universal, as policies vary among lenders and not all loan types are eligible. Homeowners should contact their loan servicer to inquire about their recasting policy and requirements. This helps determine if recasting is an option for their mortgage.

A minimum lump sum payment, which must be a single, substantial amount directed towards the principal, is a common requirement. Lenders often require a payment ranging from $5,000 to $10,000 or more, though some might accept a percentage of the principal balance. For example, some servicers may require $10,000 or a 10% payment towards the principal.

Loan type also affects eligibility; conventional loans are typically eligible for recasting. Government-backed loans (FHA, VA, USDA) are generally not eligible. Lenders often require a good payment history, such as no recent delinquencies or consecutive on-time payments. Some may also require the loan to be seasoned or for the borrower to have a certain amount of home equity.

Steps to Recast Your Mortgage

Initiating a mortgage recast begins by contacting your loan servicer directly to confirm their program and specific requirements. This can often be done through a phone call. During this conversation, inquire about the minimum lump sum payment and any associated fees.

After confirming eligibility and financial requirements, formally request the recast, which might include completing a specific application form. Make the agreed-upon lump sum principal payment, often via wire transfer, certified check, or a specific online payment portal.

Once the lump sum payment and any required application or fees are submitted, the lender processes the request. This period typically takes several weeks, potentially extending up to 90 days. Upon completion, the loan servicer provides confirmation that the recast is complete, along with a new amortization schedule reflecting the reduced monthly payments.

Recasting Compared to Refinancing

Mortgage recasting and refinancing both adjust mortgage payments, but operate through different mechanisms with distinct implications. Recasting focuses on lowering monthly payments by applying a lump sum to the principal, without altering the existing interest rate or loan term. In contrast, refinancing involves obtaining an entirely new loan to replace the current one, allowing changes to the interest rate, loan term, or even the ability to cash out home equity.

A key difference lies in the costs involved. Recasting typically incurs minimal fees, often $150 to $500, which are flat administrative charges. Refinancing, however, involves substantial closing costs, similar to those paid when purchasing a home. These costs can range from 2% to 6% of the new loan amount and may include origination, appraisal, and title services. For example, a $200,000 refinance could incur $4,000 to $12,000 in closing costs.

The impact on credit and process complexity also differ. Recasting does not require a credit check or home appraisal, making it a simpler and faster process. Refinancing, as a new loan, involves a credit check, income verification, and an appraisal, which can affect a credit score temporarily and extends processing time. Therefore, recasting maintains the current loan’s favorable terms if the interest rate is already low, while refinancing is often pursued to secure a lower interest rate or change loan features.