How do I recast a mortgage?

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In a Nutshell

When you recast your mortgage, you make a lump sum payment that reduces the principal amount you owe. Your loan is then recalculated according to the lower amount, reducing your monthly payment.
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Refinancing your mortgage can be a good way to lower your monthly payments — but it may not be the only way.

Recasting your mortgage can also be an option, if you fit the criteria. With a mortgage recast, you make a large payment toward your loan and ask your lender to recalculate your mortgage payment based on your lower remaining principal amount. This could significantly lower the amount you must pay each month.

In this article, we’ll go over how a mortgage recast works and when you might consider one.



What is a mortgage recast?

With a mortgage recast, you make a substantial lump sum payment toward the principal of your loan — and then the loan, including your payment, gets recalculated according to the lower remaining principal amount. You’ll still have the same interest rate and length of time left on your loan.

This recalculation process is also called re-amortization.

Many lenders charge a small fee to recast a loan, often around $250. There may also be a minimum amount you must put toward your principal to qualify for recasting. This is often around $5,000 — but could be as high as 20% of the remaining balance, though not all lenders require a certain amount. The more you put down, the lower your resulting monthly payment will be.

Note that you may also come across the term mortgage recast when it comes to adjustable-rate mortgages. Some types of adjustable-rate loans automatically recast at certain intervals, often every five years.

Is a mortgage recast a refinance loan?

No — recasting a mortgage is different from refinancing it.

Refinancing is taking out a new loan that pays off and replaces your current mortgage. The interest rate and other terms are likely to be different.

When you recast your mortgage, you keep the same mortgage, with the interest rate and length of the loan staying the same. Only the monthly payment changes with a mortgage recast.

Whether recasting or refinancing makes more sense as a strategy for lowering payments will depend on your situation.

If interest rates have fallen or your financial situation has improved, refinancing may be a better option because you may qualify for a lower interest rate that will save you money over time. Refinancing may also be your best choice if you need to change your mortgage type or make the loan longer or shorter,.

On the other hand, recasting could work well if interest rates have gone up (meaning you want to keep your current rate) — and if you have the money needed to put down for a recast.

Who can apply to have their mortgage recast?

To recast your mortgage, you typically must have a conventional loan — meaning one that’s not part of a government program. FHA, VA and USDA loans cannot generally be recast.

Your lender may also have criteria you must meet to be eligible to recast your mortgage. This could include a history of on-time payments.

Pros and cons of recasting your mortgage

Like any financial transaction, recasting your mortgage has its benefits and drawbacks.

Pros

  • Reduce your monthly payment. This is a primary reason people recast their mortgages. Your new payment will be calculated based on the lower principal amount owed after you make a lump-sum payment.
  • Lower fees. When you refinance, you must pay standard mortgage closing costs, which may be steep. Recasting generally requires a relatively small fee.
  • Same terms. When you recast, your interest rate and length of loan will remain the same. This can be an advantage if market conditions have changed and interest rates have gone up.
  • No credit check or appraisal required. Unlike with a mortgage refinance, you won’t need to go through a credit check or have your home appraised to qualify for recasting.

Cons

  • No ability to lower interest rate. As mentioned, your interest rate and terms remain the same. If you want to try for a lower interest rate, you’ll need to look at refinancing.
  • No ability to access equity. With a cash-out refinance, you can take out a new loan for a larger amount than you need to pay off your loan — and take the rest as cash, depending on the equity in your home. That’s not an option with recasting.
  • Cash needed. You must make a substantial lump sum payment to complete your mortgage recast. That might meaning using cash on hand that you’d otherwise have for emergencies or other expenses. You’ll want to think carefully about how much you can afford to put toward your mortgage.
  • Not all loans qualify. If you have a government loan like an FHA or VA, you won’t be able to recast.

How to apply to have your mortgage recast

Mortgage lenders don’t typically advertise recasting. You’ll likely need to contact your lender directly and let it know you’re interested.

When you go to apply for a recast, first determine how much money you can put toward your lump sum payment. Weigh that against the fee you’ll pay to recast and see how quickly you will recoup your cost. You can use Credit Karma’s loan amortization calculator to figure out what your new monthly payment might be.


Next steps: Should you recast?

This decision will ultimately come down to your personal financial situation and overall market conditions. There are two main alternatives to recasting: refinancing and making additional principal payments.

With refinancing, you get an entirely new loan, which can be good or bad.

If you qualify for a substantially lower interest rate, don’t have a ton of cash lying around to put toward your mortgage, or if you need to make adjustments to your loan terms, refinancing may be the best option.

Recasting works best if you want to keep your current loan terms, including your interest rate, but want to lower your monthly payment. Having a large, lump sum of money that you can afford to put down is a must. A loan agent or financial counselor can help you run the numbers and decide how much you can put toward a recast and invest in your mortgage.

You might also be able to make additional principal payments — putting extra money toward your mortgage — beyond your required monthly payment. If your lender allows you to make extra payments straight to your principal, you could pay off your loan faster and ultimately pay less in interest.

Your regular monthly payment amount won’t change, though. If you have a small amount of extra money to put toward your mortgage, or if you want to pay off your loan more quickly, additional principal payments may be your best option.


About the author: Andrew Dunn is a veteran journalist with more than a decade of experience as a reporter and editor at North Carolina news organizations, including the Charlotte Observer and the StarNews in Wilmington. In those roles,… Read more.