• A mortgage recast is when the borrower makes a lump sum payment toward their mortgage, and the lender recalculates the payment schedule based on the reduced loan balance.
  • A recast mortgage can save borrowers money by reducing the monthly payment amount and the total interest expense over the term of the loan. 
  • Unlike mortgage refinancing, a mortgage recast does not change your current home loan's interest rate or term length.

Are you looking to lower your monthly mortgage payment and reduce the total interest expense on your home loan? If you have a lump sum available to apply toward your mortgage, a mortgage recast might be an option for you. 

This debt repayment strategy uses a lump sum payment to reduce your loan balance and monthly payment amount going forward. 

Find out what mortgage recasting is, how it works, and how it could benefit you financially. You’ll also learn about considerations to make before recasting and alternative strategies in case recasting isn’t the right fit for you.

What Is a Mortgage Recast?

A mortgage recast is when a borrower makes a lump-sum payment toward the balance on their home loan, and the lender recalculates their repayment schedule based on the new lower loan balance.[1]

The primary purpose of mortgage recasting is to reduce your monthly mortgage payment. Once you make the lump-sum payment, the lender can eliminate that principal amount, plus any interest it would incur, from your future mortgage payments. Then, your future mortgage payments can be reduced according to the new amortization schedule (the repayment table that shows how much of each payment is applied to the principal and how much is applied to the interest).[2]

How Does Mortgage Recasting Work?

Mortgage recasting applies your lump sum payment to the loan’s balance, then reamortizes the loan to account for the sizable principal reduction. Future mortgage statements reflect the lower principal and interest amounts due. 

Importantly, the interest rate and loan terms do not change. Your recast mortgage retains the same interest rate and end date as the current mortgage.[1]

When Is Mortgage Recasting Used

Recasting is often used when the borrower has a large sum of money available to pay down some of their mortgage and reduce their monthly home loan payment. Common examples include:

  1. When a borrower receives a large sum from an inheritance.
  2. When a borrower receives a substantial work bonus.
  3. When a borrower purchases a new home before selling the previous home — when the previous home sells, the proceeds can be used to recast the mortgage on the new home. Please note that your lender may require two months of on-time payments before authorizing a recast.    

Steps To Recast Your Mortgage

Recasting is a fairly simple process:

  • Step 1: Contact your lender to see if they offer recasting. Some lenders do not offer recasting, so you’ll need to reach out to your lender to find out if they provide this option.[1]
  • Step 2: Find out if you qualify for mortgage recasting. If your lender offers mortgage recasting, they have specific qualification requirements. Recasting may be limited to borrowers with certain loan types, a certain amount of home equity, or a strong payment history. There may also be a minimum amount requirement for the lump sum payment ($10,000, for example).[1]
  • Step 3: Get the recast mortgage proposal in writing. Once you know how much you can apply to your principal, the lender can provide a recast amortization schedule so you can see how much of each payment would go toward the principal and interest after the recast. This document should also outline any fees associated with the recast. 
  • Step 4: Make the lump sum payment and pay any fees. With the details arranged and agreed to in writing, you can make the lump sum payment and pay any associated fees.
  • Step 5: Your lender recalculates your amortization schedule. You continue to make monthly mortgage payments, but now your payments are lower because the lump sum has removed a large chunk of principal and associated interest from your amortization schedule.  

Benefits of Mortgage Recasting

Mortgage recasting provides multiple benefits for borrowers.

Lower Monthly Mortgage Payments

Future monthly payments are reduced by lowering the principal amount due while retaining the same end date.

Saving on Interest Over Time

While the interest rate does not change, the borrower pays less in total interest expense. This is because the lump sum amount is removed from the loan balance and will not incur additional interest charges once the mortgage is recast. 

Potential for Eliminating Mortgage Insurance 

Many loans come with mortgage insurance, an insurance policy that allows lenders to accept low down payments by protecting them against borrower default.[3] The borrower pays premiums to retain this insurance policy. However, mortgage insurance may be eliminated (in many cases) once the borrower has built enough home equity. 

If the borrower’s recast payment causes their home equity to increase to the point where mortgage insurance can be eliminated, they can potentially drop their mortgage insurance and save even more money by avoiding future mortgage insurance premiums. 

For example, assume a lender requires an 80% loan-to-value ratio (LTV) for you to eliminate the mortgage insurance on your home loan. This would mean that the principal loan balance would need to be 80% or less than the current value of the property, giving you 20% or more in home equity. If your lump sum recast payment puts you over that threshold, you may be able to terminate your mortgage insurance and stop paying those premiums. 

No Credit Check Required

Your credit score is not a factor in recasting.[1] So, even if your score has gone down since originally qualifying for the mortgage, you can still recast as long as all recasting criteria are met. 

Considerations Before Recasting

Before recasting, there are a few considerations to take into account. 

Costs Involved in Recasting

Lenders typically charge a fee for recasting.[1] So, recasting is only worth the effort if you save enough money to more than offset those costs. Luckily, the cost is usually just a few hundred dollars, so it doesn’t take long to recover your recast investment. 

Eligibility Requirements

Recasting is not available for all mortgage loan types. Government-backed loans, including FHA, VA, and USDA loans, for example, are not currently eligible for recasting.[1]

Your lender may have additional requirements for mortgage recasting, including:

  • A minimum amount for the lump sum payment
  • A minimum amount of home equity
  • A strong history of on-time payments 

Timing and Financial Planning

If you have a lump sum available, it is worth considering if this is the right time to apply that amount toward your mortgage. Especially considering alternative uses for those funds. 

For example, if you plan to sell the home in the near future, reducing your monthly mortgage payments for just a few months may not be worth it. 

Similarly, if you have an exceedingly low mortgage interest rate and you can afford your current payments, you may prefer to invest your lump sum in an investment vehicle that offers higher returns. Why use your funds to save on a mortgage with a 4% interest rate if you can invest those funds in an investment account averaging 6% or more? 

Alternatives To Mortgage Recasting

Before recasting your mortgage, consider a few alternatives. 

Recasting vs Making Additional Payments 

You can make additional payments toward your mortgage principal without recasting.[4] This allows the flexibility of making small extra payments as your budget allows.

The difference is that making additional payments does not trigger a reamortization of your mortgage. So your future payments do not decrease. Instead, the additional payments can help you pay off your mortgage sooner.  

Recasting vs Refinancing

Mortgage refinancing is when a borrower replaces their existing mortgage with a new mortgage. This new mortgage provides a new interest rate and end date.[5]

The ability to change the end date provides an option to extend the loan terms, which could lower your monthly amount due by stretching the balance across more payments.

Refinancing is typically much more expensive than recasting, with closing costs of 2-5% of the loan amount. However, if current mortgage rates are lower than the rate on your current mortgage, a refinance can potentially reduce your interest rate, lowering your monthly payment and saving money in interest expenses, even without a lump-sum payment.   

Choosing the Most Suitable Option for Your Financial Goals

When choosing between mortgage recasting, refinancing, and simply making additional payments, consider the following:

  • How long do you plan to keep the mortgage? 
  • Are there fees involved? If so, how much?
  • How much money can you potentially save?
  • Do you have a lump sum available to put toward your mortgage, and is that the best use of those funds?

Generally speaking:

  • Making additional payments works well for borrowers who have a low interest rate and wish to randomly apply smaller amounts of money toward their mortgage principle when possible. 
  • Mortgage recasting works well for borrowers who have a low interest rate and wish to reduce their monthly mortgage payments by paying a large lump sum toward their principal.
  • Refinancing works well for borrowers who stand to get a lower interest rate by refinancing. 

The Bottom Line

Mortgage recasting is a legitimate way to reduce your mortgage payments going forward and save money on long-term interest expenses by paying down your home loan principal in a lump sum. 

However, not everyone qualifies for a recast, so it’s important to discuss your options with your lender. If you’re looking for alternative ways to reduce your monthly payment or pay off your home loan sooner, ask your lender about making additional payments or refinancing your mortgage as well. 

More on these topics: