How does recasting a mortgage work?
Mortgage recast basics
- Recasting involves making a large, lump-sum contribution toward your mortgage.
- The loan is then re-amortized, lowering your monthly payment.
- The interest rate and loan term remain the same.
- Not all mortgages are eligible for recasting.
If you’ve come into a large sum of money — be it an annual bonus or inheritance — you may be considering how to best apply the cash toward your financial obligations. Paying off expensive credit card debt and padding your emergency fund should be your first objectives. If you’re looking to knock off some of your mortgage as well, a recast could be in order.
What is mortgage recasting?
Recasting your mortgage involves making a large, lump-sum contribution to your existing mortgage principal. Your lender then re-amortizes the loan according to the new, smaller balance, resulting in lower monthly mortgage payments. All other loan conditions — such as the interest rate and term — remain the same.
You retain your existing mortgage, so there’s no need for credit checks or closing costs, though most lenders charge a fee of a few hundred dollars. Borrowers are typically required to contribute an amount of at least $5,000 to recast their mortgage. Also, you must wait at least 90 days from closing your mortgage loan before you can initiate a recast.
Can I recast my mortgage?
Lenders are not obligated to recast your loan. Not all mortgages are eligible for recasting, either. Most conventional mortgages conforming with Fannie Mae and Freddie Mac standards can be recast, and some lenders allow recasting of jumbo or nonconforming mortgages as well. Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans cannot be recast, however. Typically, fixed-rate mortgages are eligible for recasting while adjustable-rate mortgages are not, though some exceptions exist. Most lenders require that you have a history of reliable monthly payments to recast your mortgage, and only allow you to recast once over the course of your loan.
Should I recast or refinance my mortgage?
Recasting and refinancing serve different objectives. Recasting helps you reduce your monthly mortgage payments within the existing rate and term. Refinancing helps you obtain different — and ideally more favorable — loan conditions with the intention of saving money.
Refinancing replaces your existing loan with an entirely new one carrying a different interest rate, term and other conditions. It involves a new application and qualification process, complete with a credit check, origination fee, appraisal fee and other closing costs. Refinancing makes sense if you are not happy with your existing loan conditions or your financial and credit picture have changed since you took out the initial mortgage. Most people who refinance seek a lower interest rate. Refinancing typically resets the loan term as well, which can result in paying off the loan later than you would have with your initial mortgage.
Recasting makes sense if you are generally happy with your mortgage, but are in a position to pay down a larger portion of it and aim to improve your future cash flow through lower monthly payments. Contact your lender to identify recast fees and calculate your new mortgage payment. Depending on how large a payment you make, recasting may not be the most powerful money-saving strategy. Making a large contribution to your mortgage without re-amortizing and continuing to make your original monthly payments could save more in interest and help you pay off the loan faster. Watch out for any prepayment penalties in your mortgage agreement.
Recast vs. loan modification
Don’t confuse mortgage recasting with loan modification, either. Recasting is a financial strategy for the borrower with clear benefits for the lender, as well. Lenders don't take on any extra risk, as they receive more money up front in exchange for reducing your future payments over the same term.
Loan modification, on the other hand, is a courtesy granted by the lender if you are at risk of defaulting on your loan. To avoid going into foreclosure and seizing your property, a lender may modify your loan conditions to help you keep your home. The lender assumes more risk, with the hope that you will be able to regain your financial footing and continue to make payments.
Recasting your mortgage is just one tool you can use to pay back your home loan. Depending on your current and expected future finances, it may be a useful strategy to help you reduce monthly payments while staying on track with your mortgage.