How the Mortgage Recasting Process Works
While specific requirements vary by lender, the process for recasting a mortgage generally follows these steps:
- Check Eligibility: First, contact your mortgage servicer to confirm they offer recasting and that your loan type qualifies. Recasting is typically available for conventional loans but is generally not an option for government-backed loans like FHA or VA loans. You must also be current on your payments.
- Make a Lump-Sum Payment: You must make a significant extra payment directly toward your loan principal. Lenders usually set a minimum, often between $5,000 and $10,000, or a certain percentage of your remaining balance.
- Request the Recast: After the payment clears, you formally request the recast. This may involve filling out paperwork and paying a small administrative fee, typically a few hundred dollars.
- Loan Re-Amortization: Your lender will recalculate your monthly payment based on the new, lower principal balance, your original interest rate, and the remaining loan term.
For example, imagine you have a $300,000 loan with a 30-year term at a 5% interest rate. Five years into the loan, your balance is approximately $272,000. If you make a $50,000 lump-sum payment, your new balance becomes $222,000. After recasting, the lender calculates your new payment based on the $222,000 balance over the remaining 25 years at the same 5% rate, significantly lowering your monthly obligation.
Mortgage Recast vs. Mortgage Refinance
It’s crucial not to confuse recasting with refinancing. A mortgage refinance replaces your existing loan with a completely new one, while a recast simply adjusts your current loan’s payment schedule. The best choice depends on your financial goals and the current interest rate environment.
| Feature | Mortgage Recast | Mortgage Refinance |
|---|---|---|
| Primary Goal | Lowers monthly payments after a large principal reduction. | Can lower interest rate, change the loan term, or allow for a cash-out. |
| Interest Rate | Stays the same. | Changes to the current market rate. |
| Loan Term | Stays the same. | Can be shortened or lengthened (e.g., resets to 15 or 30 years). |
| Costs | A small administrative fee (e.g., $150-$500). | Significant closing costs (typically 2-5% of the loan amount). |
| Process | Simple paperwork with your current lender; no new credit check required. | A full underwriting process, including a new application and credit check. |
Who Should Consider a Mortgage Recast?
A mortgage recast is an excellent tool in specific situations:
- When You Have a Great Interest Rate: If current mortgage rates are higher than your existing rate, a recast allows you to lower your payments without losing your favorable terms.
- After a Financial Windfall: If you receive a large sum of money (e.g., an inheritance, bonus, or proceeds from a sale), a recast lets you use it to immediately reduce your housing costs.
- To Avoid High Closing Costs: If your primary goal is a lower payment and not a lower rate, recasting is far cheaper than refinancing.
Key Considerations Before Recasting
Before proceeding, evaluate the opportunity cost. Could the lump-sum payment be used more effectively elsewhere? For example, paying off high-interest credit card debt might offer a greater financial benefit. Additionally, a recast does not allow you to take cash out of your home’s equity. For that, you would need to consider a cash-out refinance or a home equity line of credit (HELOC).
For more information on how mortgage payments work, the Consumer Financial Protection Bureau (CFPB) offers resources explaining how to pay down your loan faster.