There aren’t many options if you aim to reduce your housing payments right now. It’s hard to move because housing prices are so high and mortgage rates remain elevated, though they are expected to go down in 2024.
However, you aren’t totally stuck. You could try a mortgage recast, which can be easier and more affordable than refinancing. The catch is that you’ll need a lump sum payment to get started.
What is a mortgage recast?
Lenders often refer to a mortgage recast with different names, such as a mortgage reamortization or a principal reduction modification.
No matter what it’s called, the process is the same: You make a large payment that goes toward the principal (the original sum of money you borrowed), and then the lender reamortizes the loan to determine new (lower) monthly payment. The interest rate and terms of your mortgage don’t change.
Recasting your mortgage doesn’t mean that you’ll pay off your mortgage early. Your payoff schedule remains the same, but your monthly payment will be adjusted to reflect the new loan balance.
How does a mortgage recast work?
When you recast your mortgage, you’ll pay a large chunk of money toward your principal balance and request a reamortization of your loan. For some people, this could be an option after receiving an inheritance or coming into a large sum of money.
A recast isn’t automatic, and it does involve some processing time. You’ll likely need to submit an official request to your mortgage servicer to initiate the process. Since you aren’t changing the interest rate or terms of your loan, you won’t need to complete much additional documentation or go through a credit check.
Be prepared to wait six to eight weeks for the lender to complete your new schedule. You’ll also need to sign a new agreement with your new payment obligation as well as pay a fee -- typically a few hundred dollars. Otherwise, the process is fairly straightforward.
How to qualify for a mortgage recast
To qualify for mortgage recasting, you’ll have to meet certain requirements. Your lender might want to see that you have enough equity built up to qualify. Many lenders will require a minimum sum payment to recast your loan. They will also want to see that you make regularly scheduled mortgage loan payments.
Not all loans are eligible for a mortgage recast. Government-backed loans such as VA (Veterans Affairs), FHA (Federal Housing Administration) and USDA (US Department of Agriculture) loans usually don’t qualify for a recast. Your best bet is to reach out to your lender to inquire if a mortgage recast is an option for you.
How soon can you recast a mortgage?
Not all lenders offer mortgage recasting. But if you’d like a lower monthly payment and aim to recast your mortgage sooner rather than later, you’ll have to first make sure you satisfy all the requirements, including a history of on-time payments. After establishing an initial amortization schedule to recast the loan, it shouldn’t take more than a few months.
Should you recast or refinance your mortgage?
Recasting a mortgage isn’t the same as refinancing a mortgage, and the two processes have different implications for your financial well-being.
Unlike refinancing, mortgage recasting involves handing over a large sum of money and having your lender calculate a new monthly mortgage payment based on your sizable lump sum payment. A refinance involves paying off your mortgage and replacing it with a new loan that comes with a new set of terms and a new interest rate.
When it’s wise to recast your mortgage
If you’re satisfied with your mortgage rate and have a sizable balance in your bank account (think $10,000 or more), a recast might be a good decision. You’ll be able to immediately wipe away more of your debt without dealing with expensive closing costs. Be mindful of what else you might be able to do with that money, though, such as investing it for a higher return. And if you’re feeling any sense of financial uncertainty, you’re better off holding on to the funds.
When it’s wise to refinance your mortgage
Refinance activity has slowed down since the pandemic: According to data from Redfin, more than 90% of homeowners have mortgage interest rates lower than 6%, which means that refinancing in the current high-rate environment won’t likely result in a lower interest rate. If you refinance while mortgage rates are high, you likely won’t end up saving money, but mortgage interest rates are expected to trend down in 2024. If you need to borrow money for a big expense such as a home renovation project or to pay off a large chunk of high-interest debt, a cash-out refinance could make sense.
| Recast | Refinance |
| One big payment results in lower monthly payments for the rest of your loan term | No required payment toward loan principal |
| Rate and term stay the same | Rate and term change |
| Low fees (around $250 to $300) | High closing costs (an average of around $5,000) |
| Lender reamortizes your mortgage | Option to take out money with a cash-out refinance |
How to calculate your mortgage recast
Let’s say your outstanding mortgage balance is $250,000, and you have a 5% interest rate. Your monthly payments for principal and interest are currently $2,000, and you have 25 years left on the loan. If you make a one-time payment of $50,000 and pay a recasting fee of $300 for your lender to reamortize your loan, your new payments will be $1,171, saving you $829 each month for the remainder of your loan.
Before you move forward with a recast, make sure you ask your lender for a complete estimate of your new payments based on their math.
Pros and cons of mortgage recasting
Pros
Lower monthly mortgage payments: You’ll free up room in your budget with a smaller housing payment, and you’ll save on interest.
Low fees: Most lenders charge a nominal one-time fee of around $300, significantly cheaper than the closing costs with refinancing.
Keep the same interest rate: Since mortgage rates are so high, you can hold on to your current (lower) rate as long as possible.
Cons
Large lump sum payment: You’ll need a lot of money upfront, and you’ll need to be confident that paying down your principal is the best use for it.
Not available to everyone: Not all lenders offer recasts, and government-backed loans aren’t typically eligible for them.
No ability to tap into equity: With a recast, you don’t have any option to take cash out based on your equity, which is one of the main upsides of a refinance.
Bottom line
If you recently came into a lot of cash and your current mortgage interest rate is low, recasting your mortgage might be a smart decision to chip away at your principal, reduce your monthly payment and save on interest. However, recasting isn’t always an option. If you’re interested, call your mortgage lender to see if your home loan has the potential to be recast.
FAQs
Recasting your mortgage can help lower your monthly payment without the sizable closing costs associated with refinancing. It’s important to note, however, that recasting requires you to make a lump sum payment. Be sure to think about your other financial objectives to figure out if that money might be better suited for saving or investing.
Recasting your mortgage won’t get you a lower interest rate, and your term remains the same. Another downside is that you can’t tap into your home equity with a recast.
Making additional payments toward the principal can help reduce your debt load, but it won’t lower your monthly payments. Recasting, on the other hand, will reamortize your loan and make your ongoing payment obligation more affordable.
There are quite a few ways to save money on your mortgage. If you can afford it, consider making biweekly mortgage payments, which can help you stick to a tighter budget and chip away at your principal faster. Also, if you’re still paying private mortgage insurance, consider requesting an appraisal to see if you have already hit the 20% equity mark due to appreciation.