What Is Mortgage Recasting and How Does It Work?

Mortgage recasting allows homeowners to adjust their payment schedules. This process involves applying a large principal payment to an existing home loan. It serves as an option to modify mortgage obligations without a full refinance.

Understanding Mortgage Recasting

Mortgage recasting involves a homeowner making a substantial lump-sum payment directly to the principal balance of their existing mortgage. Following this payment, the lender re-amortizes the loan. This recalculates monthly payments based on the newly reduced principal balance, while retaining the original interest rate and remaining loan term. This results in a lower monthly mortgage payment because the smaller principal is spread over the same repayment period.

The core difference between recasting and refinancing lies in their fundamental mechanics. Recasting is an administrative modification to an existing loan; it does not create a new loan. Conversely, refinancing involves taking out an entirely new mortgage to pay off the current one, often resulting in a new interest rate and potentially a new loan term. Recasting avoids the extensive closing costs, credit checks, and appraisals typically associated with refinancing.

Scenarios for Mortgage Recasting

Homeowners often consider a mortgage recast after receiving a significant financial influx. This could include proceeds from a home sale, a substantial work bonus, or a large inheritance. Other situations involve personal injury settlements or unexpected windfalls. These circumstances present an opportunity to reduce future monthly housing expenses by leveraging available capital.

Eligibility and Requirements for Recasting

Lenders establish specific criteria for mortgage recasting, and policies can vary significantly. A common requirement is a minimum lump-sum payment applied directly to the principal balance. This amount typically ranges from $5,000 to $10,000, though some lenders may require a specific percentage of the outstanding principal balance.

The type of loan also determines eligibility. Conventional loans are generally eligible. However, government-backed loans, such as those from the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and U.S. Department of Agriculture (USDA), are typically not eligible under current federal rules. The mortgage account must be in good standing, with a history of on-time payments, often requiring at least two to twelve consecutive payments. Additionally, some lenders may require a minimum remaining loan balance after the recast, such as above $50,000 or $100,000, to justify the administrative effort.

The Mortgage Recasting Application Process

Once eligibility requirements are met and the lump-sum principal payment is made, homeowners can formally request the recast. This typically begins by contacting the loan servicer directly, often through a dedicated department or online portal. The lender will then provide specific forms or instructions for submitting the request. Homeowners must continue making regular mortgage payments while the request is processed. Lenders generally take 45 to 90 days to complete a mortgage recast. Upon approval, the lender will issue a new amortization schedule reflecting the reduced principal balance and the new, lower monthly payment amount, effective on a specified date.

Costs and Other Important Considerations

While a mortgage recast avoids the substantial closing costs of a refinance, lenders typically charge a processing fee for this service. This fee is non-refundable and generally ranges from $150 to $500, with many falling in the $250 to $300 range. This cost is significantly lower than the 2% to 6% of the loan amount often seen in refinancing.

A key financial outcome of recasting is a reduction in the total interest paid over the life of the loan. Although the interest rate remains unchanged, the smaller principal balance means less interest accrues over time. The original loan term also remains the same, meaning the repayment period is not shortened. In some cases, a significant principal reduction through recasting may also help in removing private mortgage insurance (PMI) if the loan-to-value ratio falls below the required threshold.