If you have a mortgage and come into a sizable lump sum of money—such as from a bonus, inheritance, or asset sale—you might consider a loan recasting agreement to reduce your monthly mortgage payments. This financial option allows you to apply a substantial principal payment to your loan, prompting your lender to adjust your monthly payment schedule based on the new balance, while keeping the original interest rate and loan duration unchanged.
How Does Loan Recasting Work?
Loan recasting (also called mortgage recast) is a process where your mortgage lender recalculates your monthly payment after you make a large principal payment. Here’s a simple overview:
- Confirm Eligibility: Contact your mortgage servicer to find out if your loan qualifies for recasting. Most conventional loans are eligible, but many government-backed loans like FHA or VA loans are not.
- Meet Payment Requirements: Lenders generally require a minimum lump-sum payment—often between $5,000 and $10,000 or around 10% of your outstanding principal—and may charge an administrative fee typically ranging from $150 to $500.
- Make an Explicit Principal Reduction Payment: When submitting your lump sum, specify it is for loan recasting to ensure it is applied correctly. Incorrect payment designation can prevent a recast from happening.
- Sign the Recasting Agreement: Your lender will provide paperwork to formalize the recast.
- Benefit from Lower Monthly Payments: Your lender will issue a new amortization schedule showing a reduced monthly payment reflecting your lowered principal balance.
Example of Loan Recasting
Suppose you have a 30-year, $400,000 mortgage with a 4.5% interest rate, and your current balance after five years is $365,000. If you pay $60,000 toward the principal and recast your loan, the lender will recalculate your payments over the remaining 25 years at the same rate. Your monthly principal and interest payment could decrease from about $2,027 to approximately $1,692, freeing up roughly $335 monthly.
Loan Recasting vs. Refinancing: Key Differences
| Feature | Loan Recasting | Refinancing |
|---|---|---|
| Loan Modification | Adjusts existing loan | Replaces with new loan |
| Interest Rate | Unchanged | Typically changes to current rates |
| Loan Term | Remains same | Can be extended or shortened |
| Fees | Low administrative fee ($150-$500) | Higher closing costs (2%-5%) |
| Process Complexity | Simple, quick, no credit check | Complex, requires credit check and appraisal |
Who Should Consider Loan Recasting?
Loan recasting is ideal for homeowners who want to lower monthly payments without losing a favorable interest rate or facing refinancing costs. It’s best suited for those with conventional loans who have received a substantial cash sum and want to improve cash flow without extending the loan term.
Frequently Asked Questions
Does loan recasting affect my credit score? No. Since you’re not applying for new credit, there is no impact on your credit score.
Is loan recasting available for loans other than mortgages? It’s rare. Loan recasting mostly applies to conventional mortgages, not to auto or personal loans.
Are there fees for loan recasting? Yes. Lenders typically charge a modest administrative fee, usually between $150 and $500.
For more detailed information on mortgage recasting, see our Mortgage Recast guide.
Sources:
- Consumer Financial Protection Bureau: What is mortgage recasting?
- Investopedia: Mortgage Recasting
- Forbes Advisor: What Is Mortgage Recasting?
For official guidance and updates related to mortgages and payments, visit ConsumerFinance.gov.
