What Does Recast Your Mortgage Mean?

Mortgage recasting offers homeowners a way to adjust their loan payments without undergoing a full refinance. This process involves making a substantial one-time payment towards the principal balance of an existing mortgage. Upon receiving this payment, the lender recalculates the monthly installments based on the newly reduced principal, while keeping the original interest rate and loan term intact. The primary benefit of recasting is a lower monthly mortgage payment, which can free up household cash flow.

Understanding Mortgage Recasting

Mortgage recasting fundamentally alters the amortization schedule of an existing home loan. It typically begins when a borrower makes a significant lump-sum payment directly to the principal balance of their mortgage. After this payment is applied, the lender performs a reamortization. This recalculation is based on the new, lower outstanding principal balance and the original remaining loan term.

A key aspect of recasting is that the interest rate initially secured on the mortgage remains unchanged. Similarly, the original end date or term of the loan is preserved. This means that while the monthly payment amount decreases due to the reduced principal, the borrower continues to pay off the loan over the same timeframe and at the same interest rate as before the recast. The lower principal balance simply results in less interest accruing over the life of the loan, contributing to the reduced monthly payment.

Why Homeowners Recast Their Mortgage

Homeowners often pursue a mortgage recast when they acquire a significant sum of money and wish to apply it towards their housing debt. This financial windfall might come from various sources, such as an inheritance, a substantial work bonus, or the proceeds from selling a previous property. Applying these funds directly to the mortgage principal can lead to a more manageable monthly payment.

By reducing the principal balance, the amount of interest paid over the remaining loan term also decreases, which can result in long-term savings. This strategy allows homeowners to decrease their financial burden and improve their monthly cash flow. Recasting is particularly appealing for those who want to maintain their current favorable interest rate but still benefit from lower monthly obligations.

The Mortgage Recasting Process

The first step for a homeowner is to contact their current mortgage servicer to determine if recasting is available for their loan type. Generally, conventional loans are eligible for recasting, while government-backed loans such as FHA, VA, and USDA loans typically are not.

If the lender offers recasting, they will outline specific eligibility criteria, which commonly include a minimum lump-sum payment towards the principal. The loan must also generally be in good standing, meaning the borrower has a history of on-time payments. Once eligibility is confirmed, the borrower makes the required lump-sum principal payment and submits a formal request for the recast. The lender then processes the request, recalculates the amortization schedule based on the new, lower balance, and provides the homeowner with a new payment schedule reflecting the reduced monthly amount. A small administrative fee is usually charged for the service.

Recasting Versus Refinancing

Mortgage recasting and refinancing are distinct financial strategies, though both can result in lower monthly payments. Recasting involves making a large principal payment to reamortize the existing loan, keeping the original interest rate and remaining loan term unchanged.

In contrast, refinancing means replacing the current mortgage with an entirely new loan. This new loan often comes with a different interest rate and a new loan term, which could be shorter or longer than the original. Refinancing typically involves significant closing costs, which can range from 2% to 6% of the new loan amount, and requires a full application process, including credit checks and appraisals. Recasting, however, generally incurs only a small administrative fee and does not require a credit check or appraisal. While refinancing can be used to obtain a lower interest rate or cash out home equity, recasting is solely focused on reducing monthly payments by paying down the principal.