What Is a Recast Mortgage?
If you have a large sum of cash burning a hole in your pocket and are looking for lower mortgage payments, consider asking your lender for a mortgage recast. A mortgage recast is a way to change how much you pay monthly without refinancing your mortgage. The lender will apply your extra funds to your loan balance, then recalculate how much you have to pay each month. You’ll see lower monthly payments and save thousands in interest over the life of the loan.
We’ll walk you through the finer details of a mortgage recast, go over how it differs from a refinance and help you decide whether it’s right for you.
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How does a mortgage recast work?
You can use a mortgage recast to lower your mortgage payment without refinancing. But, unlike a refinance, the terms of your mortgage — such as your interest rate — won’t change. Here’s how it works:
- You make a large, lump-sum payment. Some lenders set a minimum for this large payment, but yours may not. Just keep in mind that the smaller your lump-sum payment, the less your monthly payments will change after the recast.
- Your lender recalculates your loan amount. Lenders use a process called amortization to consider how your loan amount and interest rate impact your minimum monthly payment. Your loan term will remain the same, but with a smaller balance to pay off, you’ll have lower payments each month.
- You pay a recast fee. The fee amount is up to your lender but will be small compared to what you’d pay in refinance closing costs. Those can run you anywhere from 2% to 6% of your loan amount.
- You get to enjoy lower monthly payments. Your lender will begin billing you for the new, lower amount each month, and you’ll continue to make these payments until the loan is paid off. Your smaller loan balance also means you’ll pay less in interest overall because you’ll be paying off the loan faster.
Should I recast my mortgage?
You should consider recasting your mortgage if you have a large sum of cash on hand and want a lower mortgage payment without the hassle (or expense) of refinancing. Before making any moves, however, you also need to make sure your loan qualifies — mortgages backed by the Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA) can’t be recast.
Before you jump into a recast, weigh the monthly savings it could bring against some other options. Would you be better off using your extra cash to tackle high-interest debt or beef up your emergency fund?
Here are some scenarios when recasting your mortgage makes the most sense:
→ You bought a new home before selling your previous one.
If you had to take out a loan to buy your current home and weren’t able to sell a previous home beforehand, you can recast your mortgage with the sale proceeds once your old home sells.
→ You want to get rid of mortgage insurance.
You’re usually required to pay for private mortgage insurance (PMI) if you don’t put at least 20% down when you buy a home. Once you reach 20% in home equity, however, you can cancel your PMI. Applying extra funds during a recast can help you reach that threshold.
→ You’re getting ready to retire and want the lowest possible payment.
A recast mortgage may help create room in your budget, especially if you’re working with reduced retirement income.
Pros and cons of a recast mortgage
Lower payments. You can get a lower monthly payment and pay less interest over the life of the loan.
Same interest rate. Your current interest rate stays the same so, at times when you can’t refinance into a loan with a lower interest rate, a recast can still make sense.
Lower fees. Most lenders charge a $150 to $500 fee for a mortgage recast, which is much cheaper than paying refinance closing costs.
Less paperwork. You won’t need to provide income documents or any other qualifying financial paperwork like you would when refinancing.
Waiting periods. Most lenders require proof of at least six months’ worth of payments before you can recast your mortgage.
Same payoff timeline. You can’t shorten or lengthen how long it’ll take to pay off your loan.
Taxes. A lower loan amount also means less tax-deductible mortgage interest.
Cash required. You’ll use up a large cash amount that could've been invested elsewhere.
Availability. Even if you have a conventional loan, not all lenders and servicers offer a recast mortgage option.
Mortgage recasting vs. refinancing: Which is better?
A refinance loan is when you replace your current mortgage with an entirely new one, usually at a lower rate. The table below shows when it might be better to choose a mortgage recast or refinance.
A mortgage recast makes sense if:
- You have a lump sum you can use to pay down your principal balance
- You’re happy with your current interest rate
- You don’t want to or can’t qualify for a refinance
A mortgage refinance makes sense if:
- You can get a lower mortgage rate based on today’s market
- You need to switch to a different loan program or tap your home equity
- You don’t have the cash to pay down your principal balance
Alternatives to a recast mortgage
If you don’t have a large stash of cash available for a recast, you can still pay off your loan faster and reduce interest fees with these options:
You can set up biweekly payments, which means you’ll pay half of your monthly mortgage payment every two weeks, instead of paying the full amount once per month. Because some months are longer than others, you’ll end up making the equivalent of one extra monthly payment over the course of a year. Just make your intentions known to your lender — otherwise, you could end up with late fees if you just start paying half your mortgage payment every two weeks.
There are many ways you can pay down your mortgage ahead of schedule. Adding just an extra $50 or $100 to your minimum mortgage payments is a simple way to chip away at your mortgage balance. You can also make unscheduled payments at any time if you have extra cash on hand. Be sure to let your lender know you want the extra money applied to your principal balance, not your outstanding interest amount.
Get rid of PMI
Any method that will get your home equity up to 20% can help you get rid of expensive PMI payments. Here are a few tactics to consider:
→ New appraisal. If your home’s value has increased significantly, simply getting a new home appraisal can help you drop PMI. If your home’s appraised value comes back high enough, you’ll pass the 20% equity bar without making any extra payments.
→ Piggyback refinance. This is when you take out a refinance loan and a smaller second mortgage at the same time. Your refinance loan will cover up to 80% of your home’s value. The second loan — usually a home equity loan or home equity line of credit (HELOC) — will cover the difference between your current equity and the 20% you need to avoid PMI.