Mortgage Recast: What It Is and How It Can Save You Money

If you can make a large sum-payment toward your mortgage balance, a mortgage recast may lower your mortgage costs. With a mortgage recast, you’ll end up paying less in total interest and reduce your monthly mortgage payments without going through the refinance process.

What is a mortgage recast?

A mortgage recast is when your loan amount and monthly payment are recalculated after making a large lump-sum payment. You end up with a lower payment for your remaining repayment term, but unlike a refinance, the terms of your mortgage — such as your interest rate — won’t change, and you won’t have to provide all the paperwork for a new loan. Even better: You won’t pay the standard 2% to 6% of the loan amount for refinance closing costs.

Should I recast my mortgage?

You should recast your mortgage if you have a large sum of cash and want to lower your mortgage payment without having to refinance your mortgage.

Here are some scenarios when recasting your mortgage makes sense:

You sold your previous home after buying your new one. If you had to take out a larger loan before your current home sold, you can recast your mortgage with the sale proceeds once your old home sells.

You want to get rid of mortgage insurance. If you haven’t yet built 20% equity in your home, you can use the lump-sum to pay your loan down to 80% of your home’s value, and cancel the private mortgage insurance (PMI) you’re paying to protect the lender in case of default. Be sure to check with your servicer though — they may also want to verify your home’s value before they remove the PMI.

You’re getting ready to retire and want the lowest possible payment. A recast mortgage may help you budget for reduced retirement income.

You currently have a conventional loan,  jumbo loan, home equity loan or a HELOC. If you have a loan backed by the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA), you will not be able to recast your mortgage.

Pros and cons of a recast mortgage

Pros

  You’ll pay less to recast versus refinance. Most lenders charge a fee of $150 to $500 to process recasting paperwork, which is much cheaper than the 2% to 6% of the loan amount you’d usually pay for a full refinance.

  You don’t have to requalify for the new loan amount. As long as you’ve made your payments on time, you won’t need to provide income or any other qualifying financial documents.

  You don’t have to worry about locking in a new rate. Your current rate stays the same and your new loan balance will be re-amortized based on whatever rate you locked in when you first took out your loan.

  You won’t start your loan term over. The balance is adjusted based on the current term of your loan. For example, if you have 25 years left on your current loan, then you’ll have 25 years left on the recast mortgage.

Cons

  You may have to wait to recast if your current loan is new. Most lenders require proof of at least six months’ worth of payments before you can recast your mortgage.

  You won’t be able to change your loan terms. If current rates are lower, a recast doesn’t allow you to lower the rate or shorten the repayment term.

  You may lose some tax benefits. A lower loan amount also means less tax-deductible interest.

  You’ll miss out on other cash investment opportunities. You’ll use up resources you could invest in retirement, college or stock funds.

  Your lender or servicer may not offer recast mortgage options. Even if you have a conventional loan, not all lenders and servicers offer recast mortgage services.

How to use a mortgage recast calculator

You’ll need to have some information handy to start the mortgage recasting process:

Current principal balance and interest rate: You should be able to find this on your most current mortgage statement.

Month and year of your next payment: This will most likely be your next payment due date from your mortgage statement.

Dollar amount you plan to pay down: Most mortgage servicers require at least a $5,000 lum-sum payment.

Recasting fee your servicer charges: Lenders and servicers may charge up to $500 for processing a mortgage recast. Call your current lender to find out their fee.

Here’s how the calculator works: If you have $50,000 to pay down on a $300,000 mortgage balance on a 30-year fixed-rate mortgage, at a 3.25% interest rate with a $500 recast fee.

Not only does recasting save $217.60 per month, but it will save $27,836.91 over the life of the loan. Another benefit is that you don’t have to qualify for a new loan, or pay closing costs beyond the recast fee.

How recasting a mortgage works

The table below shows the five steps you’ll typically take to recast your mortgage.

Mortgage recasting vs. refinancing: Which is better?

A refinance loan is when you replace your current mortgage with an entirely new mortgage, usually at a lower rate. The table below shows you when it might be better to choose a recast mortgage or a refinance mortgage.

Alternatives to recasting your mortgage

If you don’t have a cash stash, you can still pay off your loan faster and chop off years of interest with one or both of these other payment options.

Biweekly payments

You can set up biweekly payments, which means you’re paying your mortgage every two weeks versus monthly. Just make sure you let your lender know your intentions — otherwise, you could end up with late fees if you just start paying half your mortgage payment every two weeks.

Extra payments

Even adding an extra $50 or $100 to your minimum mortgage payment will chip away at your mortgage balance. But be sure to let your lender know you want the extra portion applied to your principal balance, not your outstanding interest amount.