What Is Mortgage Recasting and How Does It Work?

A mortgage recast offers homeowners a way to adjust their loan terms after making a significant principal payment. This financial strategy allows individuals to potentially lower their monthly mortgage obligations without undergoing the process of refinancing. It is a tool that can provide more flexibility in a household budget, especially after receiving a financial windfall.

Understanding Mortgage Recasting

Mortgage recasting involves applying a large lump sum payment directly to the principal balance of an existing mortgage. Once this payment is made, the lender re-amortizes the remaining loan balance over the original loan term. This recalculation results in a new, lower monthly payment. The original interest rate and the remaining duration of the loan remain unchanged.

Recasting differs from refinancing, as it does not involve taking out a new loan. There is no need for a new credit check, home appraisal, or extensive closing costs. Instead, recasting simply adjusts the payment schedule based on the reduced principal, offering a simpler and less expensive alternative to reducing monthly mortgage expenses. This distinction is important for homeowners looking to reduce their payments without incurring the typical costs and complexities associated with a full refinance.

The Recasting Process

The process of recasting a mortgage begins after a homeowner has made a substantial lump sum payment towards their loan’s principal balance. Homeowners should contact their mortgage lender to inquire about recasting policies and requirements. Lenders will confirm eligibility and provide details on the minimum payment necessary and any associated fees.

Once the homeowner confirms eligibility, they formally request the recast with their lender. This often involves submitting a specific form or written request. The lender then processes the request, applying the lump sum payment to the principal and recalculating the amortization schedule based on the new, lower balance. The new payment schedule maintains the original interest rate and the remaining loan term. Homeowners should continue making their regular payments until they receive confirmation and a new billing statement reflecting the adjusted amount. The entire process can take approximately 45 to 90 days to complete from the initial request.

Eligibility Requirements

Eligibility criteria for recasting vary. Conventional loans are the most common type eligible for recasting. Government-backed loans, such as those from the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the United States Department of Agriculture (USDA), are not eligible. Some lenders might also have restrictions on jumbo loans or other specific loan types.

Lenders require a minimum lump sum payment towards the principal balance to initiate a recast. This minimum can range from $5,000 to $10,000, or it might be a percentage of the remaining principal. The loan must generally be in good standing, meaning all payments are current and on time. Some lenders may also require a certain amount of equity in the home.

Financial Implications

A mortgage recast leads to lower monthly payments. The large lump sum payment reduces the outstanding principal balance, and this smaller balance is then spread out over the same remaining loan term and interest rate. While the interest rate does not change, the amount of interest paid over the life of the loan can decrease due to the reduced principal.

Compared to refinancing, recasting involves significantly lower fees. While refinancing can incur closing costs ranging from 2% to 6% of the loan amount, recasting fees are generally administrative and range from $150 to $500. Recasting does not shorten the loan term, so the mortgage is still paid off on its original schedule.