Homeowners

Want to Lower Your Monthly Mortgage Payment? Here’s How a Mortgage Recast Can Save You Money

Suddenly coming into a large chunk of money can be a gamechanger. While spending it on an epic vacation or a brand-new car is tempting, you can also use that windfall to improve your finances. If you’re a homeowner, this may be an opportunity to recast your mortgage.

A mortgage recast typically lowers your monthly housing payments because you’re making a large, lump-sum payment toward your remaining loan balance.

“A recast is a practical way to improve cash flow,” said Realtor Alexei Morgado, founder and CEO of Lexawise, a real estate exam preparation company. “It keeps the same loan, the same interest rate, and the same [repayment] term.”

What changes is your monthly payment. By putting extra money toward your mortgage balance, you typically reduce what you owe. 

Below, we’ll explore what a mortgage recast is and how it works, plus when it makes sense to use this strategy on your home loan.

What is a mortgage recast?

A mortgage recast is a process by which you make a large, one-time, lump-sum payment toward your remaining principal balance. Doing so results in a lower monthly payment without affecting your repayment timeline or mortgage interest rate.

The ability to keep an existing low rate is one of the perks of the process.

Often, homeowners recast their mortgage on a new home once they sell their old home and receive the profit from the sale.

That said, you might also recast your mortgage if you get a sizable bonus at work, receive an inheritance, or get a large tax refund from Uncle Sam.

How a mortgage recast works

Unlike a mortgage refinance, which replaces your existing loan with a new one (including a new interest rate and new repayment terms), mortgage recasts keep everything the same.

You’ll still pay off your mortgage on the previously agreed upon date and you’ll keep your current mortgage rate.

But because you’ve made a substantial lump-sum payment toward the principal balance, your lender re-amortizes your loan. That’s a fancy way of saying the lender recalculates how much you pay each month.

A recast lowers your monthly payment since you now owe less on your home but have the same amount of time to pay it off.

How to get a mortgage recast

To recast your current mortgage:

1. Contact your lender to determine eligibility

Mortgage recasts are only available on Conventional loans. If you have a government-backed mortgage, such as an FHA loan, you won’t be able to recast it.

Not every lender offers this service. If you have a Conventional loan, contact your lender to see if this is an option.

Even better: If you’re currently shopping for a home and know you’ll want to recast the mortgage once you sell your old home, limit your mortgage search to lenders that allow recasts.

2. Make the lump-sum payment

Your lender may have minimum amount requirements to do a mortgage recast, such as $5,000. Make sure you have enough cash. And remember, the more money you pay toward your principal when recasting, the lower your new monthly payment will be.

You’ll also pay a nominal recasting fee, typically up to $500. If you refinanced a loan, you would typically pay a few thousand dollars.

3. Get a new payment schedule

Your lender will re-amortize your loan after your lump-sum payment. This new amortization schedule will break down your new monthly payment amount. Resume repayment as normal.

Pros and cons of mortgage recasts

Mortgage recasts have plenty of benefits, but there are also drawbacks to consider.

Advantages of recasting your home loan

Lower monthly payments after a mortgage recast

The chief reason to recast your mortgage is to reduce your mortgage payment. Doing so builds more flexibility into your monthly budget. That can be a relief if your finances change, such as after a layoff.

Less interest paid in the long run on your mortgage

The benefit of a lower monthly payment is something you’ll feel immediately, but there’s a long-term financial benefit as well. Since the loan amount becomes smaller after recasting, less interest accrues each month. That means you’ll spend less money on interest over the life of the loan.

Don’t have to worry about closing costs

When you refinance a mortgage, you pay closing costs, much like when you originally bought your home. Mortgage recasts don’t include most of these costs.

Same loan terms and interest rate

There are a lot of pros to refinancing your mortgage, such as getting a lower interest rate or lengthening your repayment period to lower your monthly payment.

However, if you like your current rate and repayment term, a recast lets you keep everything the same. You’ll just benefit from a lower monthly payment.

“Recasting redistributes the lower balance over the remaining period but retains the existing rate,” reiterated Morgado. “That matters to existing homeowners with a low rate who have no intention of refinancing at a higher one.”

Eliminating PMI with a mortgage recast

Some mortgages require private mortgage insurance (PMI) until you reach 20% equity in your home. If you made a small down payment and haven’t hit that 20% mark, recasting your mortgage with a large enough payment to hit 20% equity may eliminate the PMI requirement and save you more money each month.

Disadvantages of recasting your home loan

Mortgage recast fee and timeline

While a mortgage recast is more affordable than refinancing, you’ll still have to pay a fee. And much like refinancing, a recast takes time.

“Fees can range from $250 to $500 and can usually be completed in 30 to 45 days,” said New American Funding Chief Servicing Officer Roger Stotts.

Minimum amount

Lenders may also require a minimum amount for a mortgage recast. For example, your lump-sum payment may need to be at least $5,000 to be eligible.

If you don’t have enough to meet the threshold, you can instead use the money to make additional payments toward your principal. Doing so won’t lower your monthly payment, but it will help you pay off your home early.

Not available for every mortgage

Mortgage recasts are only available on Conventional loans. If you have another type of mortgage, such as an FHA loan, VA loan, or USDA loan, you generally can’t recast your loan.

Ignoring other financial moves

A financial windfall can make a huge difference in your life, but you probably can’t change everything with the cash. That means you have to prioritize what the best move is for you, such as:

• Paying off your student loans or high-interest credit cards
• Establishing an emergency fund
• Saving for retirement
• Funding much-needed home renovations

Ideally, you should have an emergency fund and eliminate high-interest debt. But if your current mortgage payment is untenable, a recast could inject some breathing room into your monthly budget.