What Is a Mortgage Recast and How Does It Work?

A mortgage recast provides a way for homeowners to adjust their monthly mortgage payments without altering the fundamental terms of their loan. It involves making a substantial payment directly to the principal balance of an existing mortgage. This action triggers a recalculation of the monthly payment, allowing for reduced outflows each period while maintaining the original interest rate and remaining loan term. This process offers a distinct approach for managing mortgage obligations.

Defining Mortgage Recasting

Mortgage recasting, sometimes referred to as re-amortization, is a process where a homeowner applies a significant lump sum payment to their mortgage’s principal balance. Following this payment, the lender recalculates the monthly mortgage payments based on the new, lower outstanding principal. A crucial aspect of recasting is that the original interest rate and the remaining duration of the loan remain exactly as they were before the payment. Recasting does not create a new loan, but rather adjusts the payment schedule of the current one.

The Mechanics of Recasting

Once a substantial principal payment is received, the mortgage lender initiates a re-amortization process. This involves taking the reduced principal balance and spreading the repayment over the original remaining loan term. The calculation uses the homeowner’s existing interest rate, ensuring that no new rate is applied. This recalculation directly results in a lower monthly payment because a smaller principal amount is being amortized over the same period. For instance, if a homeowner has 20 years remaining on a 30-year mortgage, after a recast, they will still have 20 years left to pay, but with a lower monthly obligation.

When to Consider Mortgage Recasting

Homeowners consider mortgage recasting when they receive a substantial amount of money to apply to their housing debt. This could include proceeds from the sale of a previous home, an inheritance, a significant work bonus, or other large financial windfalls. The goal is to lower monthly expenses without taking on a new loan or extending the repayment period.

Eligibility for recasting requires the loan to be a conventional mortgage, as government-backed loans such as FHA, VA, and USDA loans are not eligible. Lenders require a minimum lump-sum payment, ranging from $5,000 to $10,000, although some may require up to $20,000 or more. A good payment history and the loan being in good standing are also requirements.

Navigating the Recasting Process

Initiating a mortgage recast begins with contacting the current mortgage servicer. Homeowners should inquire about their servicer’s specific recasting policies, including eligibility criteria and any required minimum payment amounts. Once the requirements are understood, the homeowner submits the lump-sum principal payment.

Along with the payment, the lender will provide any necessary forms or a recast request application. Continue making regular payments until the recast is finalized, which can take several weeks, ranging from 45 to 90 days. A fee, between $150 and $500, is charged by the lender to process the recast.

Recasting vs. Refinancing

Mortgage recasting and refinancing are distinct financial strategies for managing a home loan. Recasting involves adjusting the payment schedule of an existing mortgage by applying a lump sum to the principal, keeping the original interest rate and term intact. This process does not require a new credit check, home appraisal, or extensive closing costs.

In contrast, refinancing entails obtaining an entirely new mortgage loan, which then pays off the existing one. This new loan can come with a different interest rate, a new term length, and incurs significant closing costs, ranging from 2% to 6% of the new loan amount. Refinancing involves a credit check and a lengthy application process.