What Is a Mortgage Recast and Can It Lower Your Monthly Payment?
Homeowners looking for ways to reduce their monthly mortgage payment often think refinancing is the primary option.
But refinancing is not the only strategy that may be available.
If you have a significant amount of money available to put toward your mortgage principal, you may be able to request something called a mortgage recast.
A mortgage recast can potentially lower your required monthly principal and interest payment while allowing you to keep your existing mortgage and interest rate.
Understanding how it works can help you determine whether recasting is worth discussing with your mortgage servicer.
What Is a Mortgage Recast?
A mortgage recast is a process where you make a substantial payment toward your outstanding mortgage principal and your servicer recalculates your required monthly principal and interest payment based on the new, lower balance.
Unlike refinancing, you generally do not replace your existing mortgage with a new loan.
Instead, your current mortgage remains in place.
Your existing interest rate and remaining loan term generally stay the same, but the required principal and interest payment is recalculated based on the reduced balance.
How Does Mortgage Recasting Work?
Suppose you have been paying your mortgage for several years and receive a significant amount of money.
You decide to apply a portion of that money directly toward your mortgage principal.
If your mortgage is eligible for recasting, the process may generally involve:
- Contacting your mortgage servicer.
- Confirming that your loan is eligible.
- Making the required principal payment.
- Paying any applicable recasting fee.
- Having the servicer recalculate your payment.
- Beginning the newly calculated payment according to the servicer’s instructions.
Requirements vary between mortgage servicers and loan types.
Does Making an Extra Principal Payment Automatically Lower Your Monthly Payment?
Not necessarily.
This is an important distinction.
Making additional payments toward principal can reduce your outstanding mortgage balance and potentially reduce the total amount of interest you pay over time.
However, simply making an extra principal payment generally does not automatically change your required monthly principal and interest payment.
You may continue having the same required payment while paying off the mortgage faster.
A recast specifically recalculates the required payment using the lower principal balance.
Mortgage Recast vs. Refinance
Mortgage recasting and refinancing can both potentially reduce a homeowner’s required monthly payment, but they work very differently.
Mortgage Recast
A recast generally:
- Keeps your existing mortgage
- Keeps your existing interest rate
- Maintains the remaining loan term
- Requires a significant principal payment
- Recalculates your principal and interest payment
- May involve a relatively small servicing fee
Mortgage Refinance
A refinance:
- Replaces your existing mortgage
- Creates a new loan
- May provide a different interest rate
- May change your loan term
- Requires mortgage qualification
- May involve appraisal, underwriting, and closing costs
Which option is more appropriate depends on your existing mortgage and financial goals.
Why Might Someone Consider Recasting?
There are several situations where mortgage recasting could be worth exploring.
You Sold Another Property
Some homeowners purchase their next home before selling their previous property.
After the previous home sells, they may have a significant amount of cash available.
Rather than refinancing the new mortgage, they may choose to apply some of the proceeds toward principal and request a recast.
You Received an Inheritance
An inheritance or another financial windfall could provide an opportunity to reduce your mortgage balance significantly.
A homeowner who wants to lower the required monthly payment while keeping the existing mortgage may consider recasting.
You Received a Large Bonus
A substantial employment bonus or other one-time income could also potentially be applied toward the mortgage.
You Have Built Significant Savings
Some homeowners intentionally accumulate savings and later decide to use a portion to reduce their mortgage balance.
Before using a large amount of savings, however, consider how the decision affects your emergency fund and other financial goals.
Why Keep Your Existing Mortgage?
One of the primary advantages of recasting is that it may allow you to keep an existing mortgage that already has favorable terms.
Suppose your current mortgage has an interest rate you are comfortable with.
Refinancing would mean replacing that mortgage with a new loan based on currently available terms.
If your primary goal is simply reducing your required payment after making a large principal reduction, keeping the existing mortgage through a recast may be worth exploring.
Does Recasting Change Your Interest Rate?
Generally, no.
The purpose of a mortgage recast is to recalculate the payment based on the lower outstanding principal balance.
It is not designed to provide a new interest rate.
If your primary objective is changing your mortgage rate, refinancing may be the more relevant option to investigate.
Does Recasting Shorten Your Loan Term?
Generally, a standard recast does not shorten the remaining mortgage term.
Instead, your new, lower principal balance is amortized across the remaining term.
That is what creates the lower required principal and interest payment.
If your goal is to pay the mortgage off faster rather than reduce the required payment, making additional principal payments without recasting could be another strategy to consider.
Are All Mortgages Eligible for Recasting?
No.
Mortgage recasting is not available for every loan.
Eligibility can depend on:
- Mortgage type
- Loan investor
- Servicer requirements
- Payment history
- Minimum principal reduction
- Other applicable guidelines
Certain government-backed mortgages may not be eligible for traditional recasting.
Always contact your mortgage servicer before making a large payment specifically because you intend to recast the loan.
Is There a Minimum Principal Payment?
Mortgage servicers that allow recasting may require a minimum amount to be paid toward principal.
The requirement can vary significantly.
A servicer might establish a specific dollar amount or another minimum requirement.
There may also be a processing fee for completing the recast.
Ask for the exact requirements before moving money.
Will Recasting Lower Your Entire Housing Payment?
Not necessarily.
A mortgage recast primarily affects the principal and interest portion of your payment.
Your total housing payment may also include:
- Property taxes
- Homeowners insurance
- Mortgage insurance, when applicable
- Other applicable property expenses
Property taxes and insurance premiums can change independently of your mortgage recast.
Therefore, even after reducing principal and interest, your complete monthly payment may change in the future if taxes or insurance costs increase.
Can Recasting Remove PMI?
Do not assume a mortgage recast automatically eliminates private mortgage insurance.
PMI requirements depend on the mortgage and applicable cancellation rules.
Making a significant principal payment could affect your loan-to-value position, but PMI removal should be discussed separately with your mortgage servicer.
Confirm the requirements rather than assuming the recast itself will remove mortgage insurance.
What Are the Potential Advantages of a Mortgage Recast?
For an eligible homeowner, potential advantages can include:
- Lower required principal and interest payment
- Keeping the existing mortgage rate
- Avoiding a complete refinance
- Reducing the outstanding loan balance
- Potentially reducing interest paid over time
- Relatively simple processing compared with obtaining a new mortgage
The actual benefit depends heavily on how much principal you pay down.
What Are the Potential Drawbacks?
The biggest consideration is liquidity.
To meaningfully reduce your mortgage payment through a recast, you may need to commit a significant amount of cash to your home.
Before doing that, consider whether the money may be needed for:
- Emergency savings
- Home repairs
- Other debts
- Retirement
- Education
- Investments
- Other financial goals
Once money has been applied toward your mortgage principal, accessing it again generally requires another financial transaction involving the property.
Should You Recast or Pay Off Other Debt?
Before putting a large amount of money toward your mortgage, review your complete financial situation.
For example, you may also have:
- Credit card debt
- Auto loans
- Personal loans
- Student loans
- Other financial obligations
Those debts can have different interest rates and repayment terms.
Paying down your mortgage may feel appealing, but it is worth considering whether another use of the money better supports your overall financial goals.
Recasting Can Be Useful When Buying Before Selling
Mortgage recasting can be particularly interesting for homeowners who want to purchase their next home before selling their current property.
For example, you might purchase the new home with a smaller initial down payment while your existing home is still on the market.
After the previous property sells, you could potentially apply some of the sale proceeds toward the new mortgage and request a recast if the loan is eligible.
That could reduce the required monthly principal and interest payment without requiring you to refinance the new mortgage.
The financing should be planned carefully from the beginning, especially if you intend to rely on a future recast.
Questions to Ask Your Mortgage Servicer
Before requesting a recast, ask:
- Is my mortgage eligible for recasting?
- What is the minimum principal payment?
- Is there a recasting fee?
- What would my estimated new payment be?
- Will my interest rate remain unchanged?
- Will my remaining loan term stay the same?
- How long does the recasting process take?
- When will my new payment become effective?
Do not make a large principal payment specifically for recasting until you understand your servicer’s requirements.
Recast vs. Refinance: Which One Is Better?
Neither option is automatically better.
A recast may be attractive when you:
- Have significant cash available.
- Want to keep your existing mortgage rate.
- Mainly want to reduce your required payment.
- Have a mortgage that qualifies for recasting.
Refinancing may be worth exploring when you:
- Want to change your interest rate.
- Want a different loan term.
- Want to change mortgage programs.
- Have other financing goals that require replacing the existing loan.
Loan Velocity already provides educational resources around refinancing and ways homeowners may reduce their mortgage costs, making recasting another useful strategy to understand when comparing options.
How Loan Velocity Helps Homeowners Explore Their Mortgage Options
Loan Velocity offers Conventional, FHA, VA, USDA, Jumbo, and Reverse mortgage options and provides financing guidance based on each borrower’s individual circumstances.
If you’re trying to lower your monthly housing costs, refinancing may be one possibility, but it is important to understand your existing mortgage before making a decision.
For homeowners considering a large principal payment, comparing the potential benefits of keeping the current mortgage, recasting when available, or refinancing can provide a clearer picture of which strategy fits their goals.
Conclusion
A mortgage recast can provide eligible homeowners with a way to lower their required monthly principal and interest payment without replacing their existing mortgage.
By making a substantial principal payment and having the remaining balance recalculated across the existing loan term, you may be able to reduce your monthly obligation while keeping your current interest rate.
However, not every mortgage can be recast, and committing a large amount of cash to your home deserves careful consideration.
Before making a substantial principal payment, contact your mortgage servicer to understand your eligibility and compare recasting with refinancing and other available strategies.
