What Is a Mortgage Recast and How Does It Work?

Mortgage recasting allows homeowners to adjust their monthly payments after making a substantial principal reduction on their home loan. This process can help individuals lower their regular financial obligations without undergoing a complete loan refinance.

What is Mortgage Recasting

Mortgage recasting is a process where a lender re-amortizes a home loan based on a new, lower principal balance. This occurs after a borrower makes a significant lump-sum payment towards their mortgage. The original interest rate and the remaining loan term stay the same, distinguishing it from a mortgage refinance. The monthly payment is recalculated based on the reduced principal, spread over the existing repayment schedule, resulting in a lower monthly obligation for the homeowner.

Homeowners often pursue a mortgage recast after receiving a large influx of cash. This could stem from various sources, such as an inheritance, a significant work bonus, or the proceeds from selling a previous home. For example, if a homeowner sells a property and uses a substantial portion of the sale proceeds to pay down their current mortgage, a recast allows them to realize the benefit of that principal reduction in their monthly payments. This strategy provides financial relief by lowering recurring expenses without altering the fundamental terms of the loan.

A mortgage recast differs significantly from a mortgage refinance, which involves obtaining an entirely new loan. Refinancing typically requires a new credit check, a home appraisal, and incurs closing costs that can range from 2% to 5% of the loan amount. In contrast, a recast avoids these extensive requirements and costs because it is an adjustment to the existing loan’s amortization schedule, not a new loan. The administrative fees for a recast are generally minimal, often ranging from $250 to $500.

Qualifying and Applying for a Recast

Initiating a mortgage recast requires understanding specific eligibility criteria set by lenders. Borrowers typically need to have made a substantial lump-sum payment towards their principal balance, with many lenders requiring a minimum payment, often ranging from $5,000 to $10,000, or a certain percentage of the original loan amount. Maintaining a good payment history is also a common prerequisite.

The first step for a borrower interested in a recast is to contact their current mortgage servicer directly. They can inquire about the servicer’s specific recast program and confirm their eligibility. The servicer will provide information on their policies, including any required minimum lump-sum payment and administrative fees. Borrowers should request any necessary application forms or instructions during this initial contact.

To support the recast request, borrowers will typically need to provide documentation proving the lump-sum payment. This might include bank statements showing the large deposit or a payment confirmation from the servicer. They may also need to sign a formal request form provided by the lender. The administrative fees for a recast are typically paid at the time of application or upon approval.

The Recast Process and Its Financial Effects

Once the borrower has submitted their complete recast request and any required fees, the lender begins its internal review process. This involves verifying the lump-sum payment and eligibility. The processing time for a mortgage recast can vary, but it typically ranges from a few weeks to a couple of months. The borrower will be notified of the approval or denial of their application.

Upon approval, the lender will re-amortize the loan, recalculating the new monthly mortgage payment. This calculation is based on the reduced principal balance, the original interest rate, and the remaining term of the loan. For example, if a borrower had a $200,000 principal balance and made a $50,000 lump-sum payment, the new payment would be calculated based on a $150,000 balance over the existing term and rate.

Following the recalculation, the borrower will receive a new amortization schedule reflecting the adjusted payments. This document outlines the revised payment amounts over the remaining life of the loan. The primary financial effect for the borrower is a lower monthly mortgage payment, which can free up cash flow for other financial goals or expenses. Additionally, by reducing the principal balance earlier, the borrower may realize overall interest savings over the remaining life of the loan, although the interest rate itself does not change.