Overview

Principal curtailments and recasting are practical tools borrowers can use to reduce interest paid or lower monthly payments without refinancing. A principal curtailment is any payment made in addition to your required monthly payment that the lender applies directly to the loan principal. A recast (sometimes called a loan recasting or mortgage recast) is a service many lenders offer to adjust the monthly payment after a significant principal curtailment by re-amortizing the remaining balance over the original remaining term.

Both strategies can improve cash flow or shorten the life of a loan. In my 15 years advising borrowers, I’ve seen them work best when borrowers have a one-time windfall (inheritance, bonus, asset sale) or when they prefer to keep their current interest rate but want lower monthly payments.

(For authoritative background on mortgage servicing and borrower options, see the Consumer Financial Protection Bureau: https://www.consumerfinance.gov.)

How a principal curtailment affects your loan

When you make an extra principal payment, the lender applies that money directly to reducing the outstanding principal balance. Two immediate effects follow:

  • Interest for future periods is calculated on a smaller principal balance, so total interest paid over the life of the loan drops.
  • Your amortization schedule changes: a lower balance reduces the amount of interest in each future payment, which accelerates principal paydown if you keep the same monthly payment.

Example: Suppose you have a $300,000 fixed-rate mortgage at 4.00% with 30 years remaining. Your monthly principal-and-interest payment is about $1,432. If you make a $20,000 principal curtailment and then keep paying the original $1,432, you will shorten your mortgage term and substantially reduce total interest paid. If instead you ask the lender to recast the loan, the lender re-amortizes the new $280,000 balance over the remaining term at 4.00%, and your monthly payment drops (in many cases by roughly the same amount the principal reduction would have shortened the term if payments stayed level).

What a recast does (and what it doesn’t)

A loan recast typically:

  • Keeps your interest rate and remaining loan term unchanged.
  • Reduces your monthly principal-and-interest payment by spreading the new, lower balance across the remaining months.
  • Leaves other loan features (e.g., interest rate type, maturity date) the same.

A recast typically does not:

  • Change your interest rate (recasting is not refinancing).
  • Reset the original loan term start date; the loan still matures on the same schedule unless you and the lender agree otherwise.
  • Remove mortgage insurance automatically; if you seek to cancel PMI or other insurance, you’ll still need to meet the lender or insurer’s requirements.

Some lenders allow borrowers to make a large principal payment and keep their monthly payment the same; that reduces the term instead of lowering the monthly payment. Policies vary, so ask your servicer which options they provide.

Typical eligibility and lender rules

Eligibility and required curtailment amounts depend on the lender and loan type. Typical rules include:

  • Minimum lump-sum curtailment: Many lenders require a minimum (commonly $5,000–$10,000, or a percentage of the original balance) before they will recast. Some lenders accept smaller amounts.
  • Loan types: Conventional fixed-rate mortgages are the most commonly recastable products. Many servicers will also recast adjustable-rate mortgages (ARMs). Some government-backed loans (FHA, VA, USDA) and servicing agreements may not permit recasting or may have special rules—check your servicer. (See CFPB guidance on mortgage options: https://www.consumerfinance.gov.)
  • Fees: Lender recast fees typically range from a small administrative fee to several hundred dollars. Commonly observed fees are $150–$500, though exact amounts are lender-specific.
  • Documentation: You’ll usually need to request the recast in writing, provide proof of the lump-sum payment and complete the servicer’s recast form.

In my practice, I encourage clients to call their mortgage servicer first to get the servicer’s recaste policy in writing before moving forward with a large curtailment.

Step-by-step: How to request a recast

  1. Confirm your loan allows extra principal payments without penalty. Review your mortgage note or loan servicing agreement.
  2. Contact your lender or servicer and ask for their recast policy and fee schedule.
  3. Decide whether you want to lower your monthly payment or keep payments the same (to shorten the loan term). Not all servicers offer both options.
  4. Make the lump-sum principal payment and keep documentation (bank records, deposit confirmation).
  5. Complete the servicer’s recast request form and pay the administrative fee.
  6. Receive the new amortization schedule and confirm the new monthly payment, remaining term, and escrow/mortgage insurance status.

Costs, trade-offs, and alternatives

Costs and benefits depend on your goals:

  • Fees: Recast fees are generally modest compared with refinancing closing costs. If you want to lower payments but keep a favorable rate, recasting is often cheaper than refinancing.
  • Interest savings vs liquidity: Using a large lump sum to curtail principal reduces future interest but also reduces your liquid cash. Maintain an emergency fund before using savings to curtail a loan.
  • Refinancing comparison: Refinancing can lower your rate but often incurs closing costs and resets the term. If your current rate is low and you simply want lower monthly payments, recasting can be a simpler, lower-cost option. See our deeper discussion: “When to Recast Your Mortgage Instead of Refinancing” (https://finhelp.io/glossary/when-to-recast-your-mortgage-instead-of-refinancing/) and “Mortgage Recasting vs Refinancing: Which Is Right?” (https://finhelp.io/glossary/mortgage-recasting-vs-refinancing-which-is-right/).

Tax considerations

Principal payments themselves are not tax-deductible; they simply reduce loan principal. Mortgage interest continues to be treated under the usual IRS rules: if you itemize and qualify, mortgage interest may be deductible subject to limits and IRS rules (see IRS guidance at https://www.irs.gov and Publication 936 for details). Always consult a tax advisor about your specific situation.

Effects on private mortgage insurance (PMI) and loan-to-value (LTV)

A recast lowers your outstanding balance and therefore may improve your loan-to-value ratio. However, whether PMI is removed depends on the original mortgage terms and the servicer’s policies. Some insurers or servicers require appraisals or specific LTV thresholds to cancel PMI even after a recast.

Who benefits most from curtailments and recasting

  • Borrowers who have a one-time cash lump sum but want to keep their low interest rate.
  • Homeowners who prefer a lower monthly payment without the expense and paperwork of refinancing.
  • Borrowers who don’t want to extend their amortization clock with a new loan term.

Conversely, if you want a lower interest rate and are willing to pay closing costs, refinancing might be a better choice.

Real-world examples

Example A (lower monthly payment via recast): You have a $200,000 mortgage at 3.75% with 25 years left. Monthly P&I = $1,019. You make a $20,000 curtailment and recast. Your new balance is $180,000; re-amortizing reduces the monthly payment to roughly $917. The interest rate and remaining term remain unchanged; your monthly cash flow improves.

Example B (keep payment same to shorten term): Same loan as above. You make the $20,000 curtailment but choose to keep paying $1,019. The payment applies more to principal and the loan payoff date moves earlier — often saving more in total interest than lowering the monthly payment.

Common mistakes and how to avoid them

  • Not verifying recast policy first: Always confirm allowable curtailment amounts and recast fees with your servicer before making a large payment.
  • Using emergency savings: Don’t deplete your emergency fund to make a curtailment. Keep 3–6 months of essentials in liquid form.
  • Ignoring refinancing options: If your rate is significantly above current market rates, compare recast benefits with a refinance that could lower your interest rate.

Frequently asked questions

Q: Will a recast change my loan payoff date?
A: Usually a recast keeps the original payoff date and lowers monthly payments, but if you keep payments the same, you’ll shorten the payoff date. Verify options with your servicer.

Q: Can I recast more than once?
A: Some servicers permit multiple recasts but may limit frequency. Check your loan servicer’s policy.

Q: Do all lenders offer recasting?
A: No. Many large conventional mortgage servicers do; others, including some government-backed loan programs, may not. Confirm with your servicer.

Professional guidance and next steps

If you’re considering a principal curtailment or recast, do this first:

  1. Confirm the servicer’s recast policy and fee.
  2. Run two scenarios: (a) make the curtailment and recast to lower monthly payments and (b) make the curtailment and keep payments the same to shorten the term. Compare total interest savings and cash flow impacts.
  3. Talk to a financial planner or mortgage pro if you’re unsure which option best aligns with your cash needs and long-term goals. In my practice, clients who kept an emergency cushion and used surplus cash for curtailments often gained both lower interest costs and better monthly flexibility.

Sources and further reading

Related FinHelp.io articles:

Professional disclaimer: This article is educational and does not substitute for personalized tax, legal, or financial advice. Consult your mortgage servicer and a qualified financial or tax professional for recommendations tailored to your situation.