If you're a homeowner with extra cash on hand, you might be wondering what's the best way to use it toward your mortgage. Should you refinance? Make extra payments? Or is there a better option you haven't considered? That's where mortgage recasting comes in – a lesser-known but potentially powerful financial strategy that could save you thousands while lowering your monthly payments.
Today, we're diving deep into mortgage recasting with our comprehensive guide and calculator. By the end, you'll understand exactly how recasting works, when it makes sense, and how much it could save you compared to other options.
Lower Monthly Payments
Reduce your required monthly mortgage payment while keeping your original loan terms.
Keep Your Rate
Maintain your existing interest rate, which is crucial in rising rate environments.
Minimal Fees
Pay only a small processing fee instead of thousands in refinancing costs.
What Is Mortgage Recasting?
Mortgage recasting (also called loan recasting or re-amortization) is a process where you make a large lump sum payment toward your mortgage principal, and then your lender recalculates your monthly payments based on the new, lower principal balance – while keeping your original interest rate and loan term unchanged.
This differs from simply making extra payments, where your loan term shortens but your monthly payment stays the same. With recasting, your monthly payment decreases, but your payoff date remains unchanged.
Example: Mortgage Recasting in Action
Let's say you have a $300,000 mortgage with 25 years remaining at 4.5% interest. Your monthly payment is $1,667. If you make a $50,000 lump sum payment and recast your loan, your new principal balance becomes $250,000. Your lender then recalculates your payment based on this new balance, keeping the same 25-year term and 4.5% rate. Your new monthly payment drops to $1,389 – saving you $278 every month for the next 25 years!
"We inherited $75,000 and were debating between investing it or putting it toward our mortgage. After discovering recasting, we applied $60,000 to our principal and had our loan recast. Our monthly payment dropped by nearly $400, which gave us incredible peace of mind when I decided to switch careers. The best part was keeping our 3.25% interest rate, which would have been impossible to maintain if we had refinanced in today's market. The $250 recast fee was absolutely worth it."
The Benefits of Mortgage Recasting
Why consider recasting over other mortgage strategies? Here are the key advantages:
1. Lower Monthly Payments: Unlike making extra payments (which shortens your loan term), recasting reduces your required monthly payment, freeing up cash flow for other needs or investments.
2. Keep Your Current Interest Rate: In rising rate environments, this is particularly valuable. If you secured a low rate in the past, recasting lets you keep it while still putting a lump sum to work.
3. Minimal Fees: Recasting typically costs just $250-$500, far less than refinancing (which can cost thousands in closing costs).
4. No Credit Check or Income Verification: Since you're not getting a new loan, there's no need to qualify again or worry about credit requirements.
5. Flexibility: You maintain the option to make additional payments anytime, giving you the best of both worlds – lower required payments plus the ability to pay extra when you want.
6. Potential Tax Benefits Remain Unchanged: Your mortgage interest deduction continues as before, just with a lower interest amount due to the reduced principal balance.
7. No Extension of Loan Term: Unlike some refinancing options that extend your payoff date, recasting keeps your original payoff date intact.
Who Benefits Most From Recasting?
When Mortgage Recasting Makes The Most Sense
Recasting isn't always the best option for everyone. Here are situations where it typically makes the most financial sense:
When you have a large sum of money: Perhaps from an inheritance, bonus, investment returns, or home sale. Recasting requires a significant lump sum payment – usually at least $10,000, though some lenders set different minimums.
When you want to maintain your current low interest rate: If your existing mortgage has a favorable rate compared to current market rates, recasting lets you keep that rate while still putting your lump sum to work.
When you need improved monthly cash flow: If reducing your monthly housing costs is important to you, recasting directly addresses this by lowering your required payment.
After downsizing: If you've sold a larger home and bought a less expensive one, putting the difference toward recasting your new mortgage can significantly reduce your housing costs.
When preparing for retirement or career changes: If you anticipate needing lower fixed expenses in the future, recasting can help reduce your monthly obligations while keeping your loan timeline consistent.
When you have a conventional loan: Most conventional loans backed by Fannie Mae or Freddie Mac allow recasting, while government-backed loans (FHA, VA, USDA) generally don't offer this option.
Recast vs. Refinance vs. Extra Payments: What's Best?
With several ways to manage your mortgage, how do you choose? Let's compare the main strategies:
Mortgage Recasting
- Lowers your monthly payment
- Keeps your original interest rate and term
- Requires a lump sum payment (typically $10,000+)
- Low fee (usually $250-$500)
- No credit check or requalification needed
- Can be completed in 30-45 days
Refinancing
- Can lower your interest rate (if rates have dropped)
- Can change your loan term (longer or shorter)
- Creates a completely new loan
- Higher costs ($2,000-$5,000+ in closing costs)
- Requires full application, credit check, and home appraisal
- Typically takes 30-60 days to complete
Making Extra Payments
- Keeps your monthly payment the same
- Shortens your loan term (pays off faster)
- Provides flexibility (pay extra when you want)
- No fees
- No administrative process required
- Can be started immediately
The best choice depends on your financial goals:
- Choose recasting if you want lower monthly payments and have a lump sum available.
- Choose refinancing if current rates are significantly lower than your existing rate.
- Choose extra payments if you want to pay off your mortgage faster without changing your loan terms.
Strategic Combination: The Best of All Worlds
For maximum flexibility, consider a combined approach. First, recast your mortgage with a lump sum to lower your required payment. Then, if you have additional funds available in certain months, make extra payments toward principal. This gives you the lowest obligatory payment with the option to accelerate payoff when your financial situation allows.
How to Recast Your Mortgage: A Step-by-Step Guide
Ready to explore recasting? Here's how to proceed:
1. Check your eligibility: Not all loans can be recast. Conventional loans backed by Fannie Mae or Freddie Mac typically allow recasting, but government-backed loans (FHA, VA, USDA) generally don't. Contact your loan servicer to confirm.
2. Verify lender requirements: Ask about minimum lump sum amounts (typically $10,000 or more), fees (usually $250-$500), and any waiting periods (some lenders require you to have the loan for at least 12 months).
3. Submit a request: Your lender will have a formal process, usually requiring a written request for recasting.
4. Make your lump sum payment: Once approved, you'll make the agreed-upon principal payment.
5. Pay the recast fee: This is typically due at the time of the lump sum payment.
6. Receive your new payment schedule: After processing (which can take a few weeks), your lender will provide your new, lower monthly payment amount and updated amortization schedule.
"After selling my rental property, I had about $90,000 available. I considered paying off my mortgage entirely but realized I'd lose the mortgage interest deduction. Instead, I put $75,000 toward the principal and requested a recast. My monthly payment dropped by $560, which felt like getting a significant raise. The process was straightforward – I called my lender, filled out a form, paid the $300 fee, and within 30 days, my new lower payment took effect. I've recommended this strategy to several friends who had no idea it was an option."
Pro Tip: Timing Your Recast
The earlier in your mortgage term you recast, the more interest you'll save over the life of the loan. This is because mortgages are front-loaded with interest payments. A lump sum applied in year 5 will save more interest than the same amount applied in year 15.
Common Questions About Mortgage Recasting
Can I recast multiple times?
Yes, most lenders allow multiple recasts, though they typically require a minimum time between recasts (often 12 months) and will charge the recast fee each time.
Will recasting affect my credit score?
No, recasting doesn't involve a credit check or new loan application, so it won't impact your credit score.
Is there a deadline to recast after making a large payment?
Some lenders require that the recast request be made within a certain timeframe after a large payment. If you've already made a large principal payment and want to recast, contact your lender promptly.
Can I recast if I've been making extra payments over time?
Generally, no. Most lenders require a single lump sum payment specifically for recasting, rather than recasting based on accumulated extra payments. However, policies vary by lender, so it's worth asking.
Making the Most of Our Mortgage Recast Calculator
Our calculator above helps you visualize the impact of recasting on your specific loan. Here's how to get the most accurate results:
1. Enter your current loan details: Make sure to use your remaining balance (not the original loan amount) and the remaining term (not the original term).
2. Experiment with different lump sum amounts: Try various scenarios to see how different payment amounts affect your results.
3. Compare options: Use the comparison tab to see how recasting compares to refinancing or making extra payments.
4. Check the amortization schedule: This detailed view shows exactly how your loan will progress month by month after recasting.
5. Review the charts: Visual representations can help you better understand the long-term impact of your decision.
Recasting Limitations and Potential Drawbacks
While recasting offers significant benefits, it's important to be aware of potential limitations:
Not available for all loan types: Government-backed loans (FHA, VA, USDA) typically don't allow recasting.
Requires a substantial lump sum: You'll need at least $10,000 in most cases to make recasting worthwhile.
Opportunity cost considerations: Money used for recasting can't be invested elsewhere, which might offer higher returns depending on market conditions.
Doesn't change your interest rate: If your current rate is high, refinancing might be more beneficial despite the higher costs.
Not all lenders offer it: Some smaller lenders or credit unions may not provide recasting services.
Final Thoughts: Is Mortgage Recasting Right for You?
Mortgage recasting is a powerful but underutilized tool in the homeowner's financial toolkit. It offers a way to substantially reduce your monthly payment without the costs and complications of refinancing, while putting a large sum of money to work lowering your housing costs.
However, it's important to consider your broader financial picture. Before recasting, consider whether that lump sum might be better used elsewhere – perhaps paying off higher-interest debt, maxing out retirement contributions, or investing for growth if you expect returns higher than your mortgage interest rate.
The best financial decisions align with both your immediate needs and long-term goals. Our calculator helps you see the numbers clearly, but the right choice depends on your unique situation and priorities.
Need Professional Advice?
While our calculator provides accurate mathematical projections, every financial situation is unique. For personalized advice tailored to your specific circumstances, consider consulting with a certified financial planner or mortgage professional who can help evaluate whether recasting aligns with your broader financial strategy.
Have you tried recasting your mortgage? We'd love to hear about your experience in the comments below!