What Is a Mortgage Recast and How Does It Work?

Understanding Mortgage Recasting

Mortgage recasting recalculates monthly payments on an existing mortgage based on a new, lower principal balance. This adjustment occurs after a borrower makes a large, one-time payment directly to their mortgage principal. The original interest rate and loan term generally remain the same, distinguishing it from other mortgage modifications. Its primary purpose is to reduce the borrower’s monthly financial obligation, not to shorten the overall repayment period. This option is often considered by homeowners who receive a financial windfall, such as an inheritance, a large work bonus, or proceeds from a home sale.

Eligibility for recasting depends on several criteria. Lenders require a substantial principal payment, often a minimum of $5,000 to $10,000. The loan must be current, with a history of on-time payments. Lender policies vary, as not all lenders offer recasting, and some have unique requirements like minimum equity thresholds. Conventional loans are generally eligible, but government-backed loans like FHA, VA, and USDA loans are not.

Recasting differs significantly from refinancing, which involves obtaining an entirely new loan to pay off the existing one. Refinancing often entails a new interest rate, a new loan term, a full credit check, and substantial closing costs, typically 2% to 6% of the new loan amount. In contrast, recasting does not change the original interest rate or loan term, avoids a new credit check or appraisal, and involves much lower administrative fees. This makes recasting a less complex and more cost-effective option for reducing monthly payments when a borrower is satisfied with their current interest rate and loan terms.

The Recasting Process

Initiate a mortgage recast by contacting your mortgage servicer or lender to inquire about their recasting policies. This confirms if recasting is an option for your loan and clarifies eligibility requirements. Lenders will outline procedures, including minimum principal payment amounts or required forms.

Next, make the required large principal reduction payment. This payment directly reduces the outstanding loan balance upon which new payments will be calculated. Ensure the payment is applied specifically to the principal, as directed by the lender.

After the principal payment, submit a formal recast request or application to the lender. This often involves completing a specific form that acknowledges the request and the lump-sum payment. The lender may require minimal documentation, such as confirmation of the principal payment.

The lender reviews the request, verifies the principal payment, and assesses eligibility based on internal guidelines. Upon approval, the lender generates a new amortization schedule reflecting the reduced principal balance and detailing the new, lower monthly payment for the remainder of the original loan term. Recasting fees are administrative and minimal, typically $150 to $500, significantly less than refinancing costs. The entire process, from inquiry to new payment, can take several weeks to a few months.

Financial Impact of Recasting

The primary financial impact of a mortgage recast is a reduced monthly payment. Applying a large, one-time sum to the principal balance significantly lowers the amount owed. The lender then re-amortizes this smaller balance over the same remaining loan term, resulting in a decreased monthly payment. This provides immediate cash flow relief for the homeowner, freeing up funds for other financial goals or expenses.

Recasting can also lead to substantial savings in total interest paid over the loan’s life. Although the interest rate remains unchanged, interest is calculated on the outstanding principal balance. Reducing the principal early means the borrower pays interest on a smaller sum for the loan’s duration. This reduction can lead to significant long-term savings, even if the original maturity date does not change.

With a mortgage recast, the original loan term remains the same. The benefit comes from lowering the monthly payment due to a reduced principal, not from shortening the repayment time frame. This contrasts with making extra principal payments without recasting, which accelerates payoff but keeps the monthly payment constant. While the loan term remains the same, reducing the principal balance through recasting accelerates equity build-up. A larger portion of each future payment goes towards paying down the principal, increasing the homeowner’s ownership stake more quickly.

For example, consider a homeowner with a 30-year fixed-rate mortgage of $300,000 at a 6% interest rate, resulting in a monthly principal and interest payment of approximately $1,798. If, after five years, the homeowner makes a $50,000 lump-sum principal payment, the outstanding balance might drop to around $230,000. Recasting this new balance over the remaining 25 years at the same 6% interest rate could reduce the monthly payment to approximately $1,480, saving over $300 per month. This reduction also means less total interest paid over the remaining 25 years compared to continuing payments on the original higher principal balance.