Does a Mortgage Recast Save You Money? Yes and No

You’re probably aware that you can pay extra towards your mortgage to reduce your loan balance. But did you know that a mortgage recast allows you to also cut your monthly payments without a refinance?

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What Is a Mortgage Recast?

With a mortgage recast, you make a one-time payment – often referred to as a principal curtailment – to reduce your loan amount.

Your lender then re-amortizes your new balance across your remaining payment schedule. This usually results in lower monthly payments.

Getting a mortgage recast is simple and doesn't require going through the loan application and underwriting process. Instead, you make your lump sum contribution, pay a modest recasting fee, and get lower monthly payments without the hassle or costs of refinancing.

It’s important to note that recasting your mortgage only changes your monthly payment amount. It will not adjust your interest rate or alter the number of remaining payments.

Benefits of Recasting Your Mortgage

Some of the benefits you can expect from recasting your mortgage include:

• Reduced Monthly Payments: With the exception of homeowners with certain adjustable-rate loans, recasting will result in lower monthly payments for the remainder of your mortgage.

• No Credit Check or Financial Underwriting: Since you’re not taking out a new loan, your lender will not need to run a new credit check or reevaluate your finances.

• No New Appraisal: You won’t need a new appraisal to recast your mortgage, which saves time and avoids low valuations.

• You Can Keep Your Interest Rate: Recasting only affects your monthly payments. If you currently have a favorable interest rate, you can keep it.

• You’ll Pay Less Lifetime Interest: Paying down your principal reduces the interest you'll pay across the remainder of your loan.

• Recasting Cost Far Less Than Refinancing: Recasting fees are low and will save thousands of dollars compared to refinancing, even with small balance loans

Does a Mortgage Recast Save You Money? Yes and No

Both recasting and making an extra payment are great strategies to reduce your mortgage burden, but they do so in different ways.

In general, recasting reduces monthly expenses but increases lifetime loan costs.

Making a principal reduction saves you thousands in interest, but doesn’t help your monthly budget.

For Example: You have a $383,000 loan at 5.5%. You recently inherited $150,000 and are considering putting it towards your mortgage, either by recasting or making an extra payment.

Current Loan Payments and Interest Cost

Here's your existing loan if you chose to use the inheritance for other purposes and kept your mortgage as-is.

Recasting Your Mortgage

Here’s how it would change your current payment and interest cost by using the $150,000 to reduce your loan balance to $233,000 and re-amortizing your payments for the remaining 27 years of your mortgage.

By recasting, you could reduce your monthly payments by nearly $900 and total interest cost by more than $138,000. This includes the $64,667 in interest you’ve paid so far and the $214,771 due across the remaining re-amortized term.

Making an Extra Payment

If you decide not to recast your mortgage, or if your lender doesn’t offer recasting, here’s how making an extra $150,000 payment would affect your loan length and interest cost.

By not recasting and continuing to pay your current monthly minimum, you could cut your total loan length in half and have your home paid off in fewer than 15 years. Plus, drastically reducing your loan term reduces your total interest costs far more than re-amortizing at a lower balance.

In this scenario, you could save $131,000 over the life of your loan through an extra principal payment compared to a mortgage recast, although your monthly obligations would remain unchanged.

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What Types of Mortgages Can Be Recast?

Both Fannie Mae and Freddie Mac allow lenders and servicers to recast conventional loans. In addition, borrowers with non-qualified and jumbo mortgages may be able to recast their loans as well.

Unfortunately, you can't recast your mortgage if you have a government-backed loan insured by the FHA, VA, or USDA. Federal guidelines for these types of home loans prohibit recasting.

However, just because your mortgage is eligible to be recast doesn't mean your lender will approve the re-amortization. Not all companies offer mortgage recasts. Contact your lender or loan servicer for their policy on recasting.

If your lender doesn’t accept your request to recast, you can still pay down your principal balance. This method, however, will not reduce your monthly payments. Conversely, you can consider a cash-in refinance (when you pay in money at closing) with another mortgage provider.

What is the Minimum Principal Payment for a Mortgage Recast?

Mortgage recasting involves making a lump sum payment to reduce your loan balance. The minimum principal curtailment required for a mortgage recast can vary by lender.

Among companies that offer mortgage recasts, it's common to find a required minimum principal reduction of at least $10,000. Instead of a fixed amount, some companies may require you to pay a percentage of your unpaid balance, such as 10%.

This means you probably can’t recast your mortgage if you’ve made incremental extra payments over time. That is, unless you make a single lump sum payment now.

How Much Does a Mortgage Recast Cost?

The cost to recast your mortgage can vary from lender to lender, but you can expect a processing fee of between $250 and $500. These fees are flat-rate and consistent regardless of your loan size.

Recasting fees are much lower than the closing costs associated with refinancing, which typically run between 2% and 4% of the total loan balance.

Say you have a $300,000 mortgage and want to reduce your principal by $50,000. Recasting would cost between $250 and $500. On the other hand, doing a cash-in refinance to reduce your balance would result in $5,000 to $10,000 in closing costs on the new $250,000 loan.

Common Reasons Homeowners Recast Their Mortgages

Homeowners commonly use a mortgage recast when they've purchased a new home prior to selling their old one. After their property sells, the proceeds are used to reduce their new loan balance and monthly payments.

However, recasting can be helpful in any situation where someone has the ability to make a large mortgage payment and wants to reduce their monthly debt obligations.

Some other common reasons why homeowners choose to recast their mortgage include:

• They’ve received an inheritance

• They were awarded a settlement

• Their employer paid them a one-time bonus

• They’re reaching retirement age and preparing for fixed income

• They want to drop their loan-to-value ratio below 80% to eliminate mortgage insurance

Mortgage Recasting vs Refinancing

With a mortgage recast, you will lower your monthly payments but won’t reduce your interest rate or adjust your repayment schedule.

Refinancing requires taking out a new loan to pay off your existing mortgage. Your interest rate will likely change, which could be good or bad, depending on your current rate. Plus, you can shorten or lengthen the term of your mortgage to match up with your financial goals.

You can still reduce your principal balance with a cash-in refinance but expect to pay closing costs of 2% to 4% of your remaining loan amount. Conversely, recasting comes with a processing fee that typically ranges from $250 to $500.

Plus, refinancing your mortgage requires you to re-complete the loan application and qualification process. In most cases, you'll even need a new home appraisal. None of this is necessary with a recast, which means you are eligible even if you've run into credit problems or your income has decreased.

Frequently Asked Questions About Mortgage Recasting

Still curious whether you should recast your mortgage? Here are some of the most commonly asked questions about mortgage recasting.

Can I Recast My Mortgage With a Different Lender?

No, only your existing lender or servicer can recast your mortgage. If you're unhappy with your current company, or if they don't allow mortgage recasts, consider refinancing elsewhere and paying down your principal at closing.

Is There a Waiting Period to Recast Your Mortgage?

In most cases, there is little to no waiting period to recast your mortgage if your lender allows for re-amortization. However, each lender chooses whether to impose a waiting period for recasting. In some situations, you'll need at least a few months of on-time payments to qualify.

Is a Mortgage Recast the Best Use of My Savings?

Recasting your loan can reduce your mortgage payments and free up a portion of your monthly budget. But for some homeowners, it may make more sense to pay down higher interest accounts like credit cards and auto loans. If you can earn a rate of return higher than your mortgage’s interest rate, you may even consider investing the funds instead.

Is a Mortgage Recast Right for You?

If you have the funds available, paying down your loan balance and recasting your mortgage can help slash your monthly payments. However, not all lenders allow for a mortgage recast. If the company you work with doesn’t offer re-amortization, the only way to reduce your monthly payments may be to refinance with another mortgage provider.