When to Recast Your Mortgage Instead of Refinancing

Quick answer

Recasting a mortgage is usually the best choice when you have a one-time lump sum (inheritance, bonus, investment sale), your existing interest rate is attractive, and you want lower monthly payments quickly and cheaply—without taking out a new loan. Refinancing becomes preferable when you need a lower interest rate, a different loan term, or want to cash out home equity.

How recasting differs from refinancing (short primer)

• Recasting (re-amortization): You pay a lump sum toward principal. The servicer recalculates monthly payments using the same interest rate and remaining term. No new loan file, typically a small administrative fee (often $150–$500, but this varies by servicer) and minimal paperwork. CFPB/ConsumerFinance.gov notes that recasts are less complex than refinancing and are offered at the lender’s discretion.

• Refinancing: You replace your current mortgage with a new loan. That usually requires a credit check, income verification, appraisal, and closing costs (often thousands of dollars). Refinancing can change your rate, term, and loan type (e.g., to an adjustable-rate mortgage or a different loan program).

Who can typically recast a mortgage?

• Most conventional (portfolio or conforming) loans: Many lenders and servicers offer recasting for conventional loans. Exact eligibility and minimum lump-sum amounts vary by lender.
• Government loans (FHA/VA/USDA): Policies vary and these programs often do not support standard recasting the same way conventional loans do; check HUD or your loan servicer before assuming availability. For FHA loans, specific FHA rules apply—confirm with HUD/your servicer. (See HUD: https://www.hud.gov)
• Requirements often include: a history of on-time payments, no recent loan modifications, and a minimum principal curtailment (commonly $5,000, but some servicers require more).

Typical costs and timing

• Administrative fee: Frequently in the $150–$500 range (some servicers charge a flat $250). Confirm the exact fee with your lender.
• No appraisal, no new underwriting in most cases.
• Turnaround: Often a few weeks from request to new payment schedule. Faster than a full refinance.

Authoritative sources: Consumer Financial Protection Bureau explains that lenders decide whether to offer recasts and describes the general process (ConsumerFinance.gov). HUD publishes rules for FHA loans and program-specific exceptions—confirm the rules that apply to your loan (HUD.gov).

How much will your payment drop? A quick way to estimate

Your monthly payment drops in proportion to the reduction in outstanding principal—because the interest portion is calculated on the new, lower principal. To estimate:

1. Find your current remaining principal balance and monthly payment.
2. Subtract the lump-sum principal payment to get the new balance.
3. Recalculate the monthly payment using the same interest rate and remaining loan term (many servicers will provide this for free).

Example: A 30-year loan of $300,000 at 4.5% has a payment (principal & interest) ≈ $1,520. If your current balance is $280,000 and you pay a $30,000 lump sum to recast, your new balance is $250,000. The lender reamortizes the 25 years left at 4.5% producing a smaller monthly payment—often a few hundred dollars lower depending on remaining term.

I often run both a recast and refinance scenario for clients side-by-side. If a client has a low existing rate, the monthly drop from recasting plus the low fee often wins over refinancing.

When to choose recast: checklist

Choose recast if most of these apply:

• You have a one-time lump sum (e.g., inheritance, bonus, investment sale).
• Your current interest rate is competitive and you don’t need a lower rate.
• You want to reduce monthly payments but keep the original loan’s terms and interest rate.
• You plan to stay in the home but aren’t seeking a different loan product or cash-out.
• You prefer a low-fee, low-paperwork option.

When refinancing is likely the better option

Refinance when any of the following apply:

• Current mortgage rate is higher than market rates and you can meaningfully reduce your rate.
• You want to change the loan term (e.g., move from 30 to 15 years) or switch loan types (adjustable to fixed).
• You want to take cash out of your home’s equity.
• You need to consolidate debt with a cash-out refinance or change loan servicing for credit reasons.

Remember the break-even rule: months to recoup closing costs = closing costs ÷ monthly payment savings. Example: $4,500 closing costs ÷ $300 monthly savings = 15 months.

Pros and cons

Pros of recasting

• Low cost vs refinance (small administrative fee vs thousands in closing costs).
• Fast process and minimal underwriting.
• Keeps your current interest rate and loan terms.
• Reduces monthly payment and interest paid over time (because principal is lower).

Cons of recasting

• No change to interest rate—if your rate is above market, recast won’t lower it.
• Not all lenders offer recasting and rules vary.
• You use cash to reduce a non-liquid asset—evaluate alternative uses like paying higher-interest debt or investing.

Tax and financial planning notes

• Mortgage interest deduction: Because a recast reduces the mortgage interest you’ll pay each year, it can reduce your deductible mortgage interest. Consult a tax professional for how a recast affects your tax situation.
• Opportunity cost: Consider alternative uses for the lump sum (retirement savings, paying off high-interest debt, investing). Sometimes paying down high-interest credit card debt produces a better return than applying cash to a mortgage.

Step-by-step: How to request a recast

1. Contact your loan servicer and ask if they offer recasting (use your mortgage statement or the servicer website).
2. Ask about eligibility, minimum lump-sum amount, exact fee, and documentation required.
3. Verify there are no prepayment penalties (rare on modern mortgages but confirm).
4. Arrange the lump-sum payment and submit the request per servicer instructions.
5. Receive and review the new amortization schedule—confirm the new monthly payment and effective date.

In my practice, I always obtain the amortization schedule in writing before clients transfer funds. That avoids surprises and ensures the servicer applied funds correctly.

Common misconceptions and pitfalls

• “Recasting eliminates loan interest entirely.” False—recasting lowers the balance so you pay less interest going forward, but interest continues until the loan is paid.
• “All loans can be recast.” False—many lenders don’t offer recasting for FHA/VA loans or for certain servicing arrangements. Check with your servicer.
• “Recasting is always the cheapest option.” Not necessarily. If you can refinance to a much lower rate and stay in the home long enough to recoup closing costs, refinancing may save more over time.

Real-world example (decision comparison)

Client A: 30-year balance $280,000 at 5.0%, 25 years remaining. Monthly P&I ≈ $1,632. They have $40,000 extra cash.

• Option 1 — Recast: Apply $40,000 -> new balance $240,000. New payment (25-year remaining at 5.0%) ≈ $1,395. Monthly savings ≈ $237. Recast fee $300.
• Option 2 — Refinance: Refinance to 4.0% for 25 years with $4,000 closing costs. New payment ≈ $1,268. Monthly savings vs original ≈ $364. Break-even = $4,000 ÷ $364 ≈ 11 months.

If they plan to stay at least 11 months and prefer a lower rate, refinance wins. If they want a fast, low-fee change and prefer to avoid closing costs, recast is attractive.

Next steps and resources

• Contact your loan servicer to confirm whether they offer recasts and the exact fee and minimum.
• Use the break-even formula above to compare recast vs refinance given your projected savings and costs.
• Discuss tax implications with a CPA if you rely on mortgage interest deductions.

Related reading on FinHelp:

• When to Use a Short Recast Instead of a Full Refinance: https://finhelp.io/glossary/when-to-use-a-short-recast-instead-of-a-full-refinance/
• Refinancing 101: When to Refinance Your Loan: https://finhelp.io/glossary/refinancing-101-when-to-refinance-your-loan/
• Home Equity Alternatives: HELOCs vs Home Equity Loans vs Cash-Out Refinance: https://finhelp.io/glossary/home-equity-alternatives-helocs-vs-home-equity-loans-vs-cash-out-refinance/

Professional disclaimer: This article is educational and not personalized financial advice. In my practice as a financial strategist, I recommend reviewing your full cash-flow and investment priorities before using a lump sum to recast a mortgage. Always confirm lender policies and consult a qualified tax or financial advisor for decisions specific to your situation.

Authoritative sources and further reading: Consumer Financial Protection Bureau (consumerfinance.gov), U.S. Department of Housing and Urban Development (hud.gov).