How a mortgage recast can save you money

A mortgage recast is a strategy to reduce how much you spend on your home every month. You contact your lender to apply for a recast, make a large payment on your loan, and then your remaining payments are recalculated based on the new amount that you owe (your principal). 

"This is particularly helpful to folks that locked in a low rate early this year and would have to take a higher rate if they refinanced," according to Cameron Phelps, Operations Manager at Orchard Mortgage.

Unless you paid for your home in cash, you’re committed to paying for it for years. Who could blame you for wanting to shave a little off that monthly payment? A mortgage recast is less complicated than a refinance since you don’t have to undergo the same underwriting scrutiny. For homeowners with a little more flexibility in their cash flow, a recast is a smart financial maneuver.

What is a mortgage recast?

A mortgage recast, also called a loan recast, is when you make a lump-sum payment towards the principal balance on your mortgage. The lender then reamortizes the loan - which means they recalculate your future payments based on the new (lower) loan principal and amortization schedule.

Recasting will cut your monthly payments and the amount of interest you’ll pay over the life of the loan, but it does not impact your interest rate or loan terms.

Some mortgages have a scheduled recast date built into the loan, and others make it an option for the homeowner throughout the life of the loan. You can check the terms of your mortgage to find out what’s possible or ask your loan officer.

How does recasting a mortgage work?

The primary benefit of recasting a mortgage is to reduce your monthly payment amount, and a sufficiently large enough payment can also reduce the amount of interest you pay in total.

Most lenders require at least $5,000 to recast a mortgage, but the terms vary by lender and mortgage. After making the lump-sum payment, the remaining balance gets amortized to reduce monthly payments. 

Typically, you’ll also have to pay a fee to recast your mortgage, depending on the mortgage terms and lender. This fee doesn’t usually exceed a few hundred dollars, which should be worth it when compared to your potential interest savings.

Example

Let’s say your 30-year mortgage carries a principal balance of $400,000 with a 5% interest rate. You pay about $2,100 per month.

• To recast your mortgage, you pay a lump sum of $50,000.
• You also pay a fee to the lender of $250.
• The mortgage reamortizes based on your new principal of $350,000.
• Your monthly mortgage payment decreases to about $1,840, saving you over $40,000 during the life of your mortgage.

Recasting a mortgage vs paying down the principal

Simply making a larger-than-usual monthly payment will not count as a recast. You need to notify your lender ahead of time if you plan to recast your mortgage. If you don’t, the lump sum payment won’t go towards the principal - it’ll just be applied towards the following month’s payment, and you’ll eventually have to pay the same amount once the larger payment has been credited. 

Paying more than your monthly payment or making an extra payment without recasting your home loan can be useful when you have a little extra money on hand or are forgetful about making payments, but in the long run they won't bring down your principal any faster.

To help you figure out your potential savings by recasting, you can use a mortgage calculator. Input what your new loan balance would be after paying a lump sum to see what the monthly payment would be. (Don’t add a down payment.) 

How do you get a mortgage recast?

Recasting your loan involves four easy steps:

1. Make sure you qualify.
2. Reach out to your mortgage lender or loan servicer.
3. Pay a lump sum (and any fees).
4. Continue to pay your usual mortgage payment until the recast is processed.

When do you qualify for mortgage recasting?

Not all types of mortgages are eligible for recasting and not all lenders offer mortgage recasting in their loans. Individual standards vary from lender to lender, but generally, keep these points in mind:

• Have the right type of loan: You cannot recast a government-backed loan, like an FHA loan or VA loan. Most jumbo loans are also excluded from recasting.
• Meet minimum principal reduction standards, usually $5,000. This number could also be a percentage of your principal.
• Have enough equity in your home: Lenders often require you to have built a certain amount of equity (in fixed dollars or a percentage of your principal balance) before recasting.
• Have a strong payment history: Most lenders will not authorize recasting if you have a history of missing mortgage payments.
• Meet the waiting period: "The waiting period varies and depends on the servicer," according to Phelps. Some lenders may not impose one at all.

Mortgage recasting vs. refinancing

In a mortgage refinance, you replace your current mortgage with a new mortgage. That involves applying for an entirely new home loan and going through the mortgage underwriting process with a lender again. That means if your financial circumstances have changed, like you make less money or your credit score went down, you may have difficulty qualifying for the best terms. Mortgage recasting is simply a payment against the remaining principal on your mortgage.

Homeowners refinance to lower their interest rate, shorten the terms of their mortgage, tap into home equity, consolidate debt, or convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice versa. However refinances can be more costly. (When you buy a home with Orchard, and use Orchard Mortgage, you'll get no-fee refinancing for the life of the loan. We can also help you line-up closing, if you're buying and selling at the same time.)

Homeowners recast to reduce monthly payments and, potentially, lower the total interest paid during the life of the loan. Recasting is a less involved, less complicated process than refinancing, but it also accomplishes fewer goals —though a significant one in lowering your loan payment amount.

Advantages of mortgage recasting

The basic impetus behind recasting a mortgage is to save money. But there are other important advantages, too. 

• It’s relatively easy to do. 
• It requires a relatively small sum of money upfront.
• It helps you avoid re-qualifying for a new loan (aka refinancing).
• If you already have a low interest rate, you can keep it.

Drawbacks of a recast mortgage

The drawbacks of mortgage recasting are basically the inverse of the advantages.

• You can't lower your interest rate.
• If you lack home equity, you may have to put a very large amount of money down to save on interest payments through a recast.
• More of your cash becomes tied up in your equity, making it unavailable for other investments.
• It doesn’t shorten the length of your mortgage, like a refinancing might.
• You’ll have to pay a fee. While this is nominally small, it’s something to keep in mind.

Should I recast a mortgage?

Like any question in real estate, a recast mortgage isn’t the right choice for everyone. When interest rates go down, it makes for a good time to refinance instead of recasting a mortgage. 

When mortgage rates increase refinancing makes less sense, but loan recasting can help you lower your monthly payments without affecting your interest rate.

The ideal conditions for recasting your mortgage are when:

• You qualify for recasting under your lenders requirements.
• You’re already satisfied with your mortgage rate.
• You have a large sum of liquid cash available and no major current or upcoming debts.
• You have enough equity in your home that a mortgage recast will reduce your monthly payment.

Recasting doesn’t reduce the term of your mortgage. You’ll still have the same mortgage term, but the principal and interest amount will just be lessened, represented by your smaller monthly payment.