What Does It Mean to Recast a Mortgage?

Mortgage recasting is one way to lower your monthly mortgage payments. Instead of taking out a new mortgage like you would with a refinance, recasting allows you to keep the same mortgage and lower the loan balance by making a large one-time payment to your lender. 

Recasting a mortgage is particularly useful for people who need to reduce their monthly debts in order to qualify for additional credit, are hoping to save money each month, or who have purchased a second home prior to selling their existing home, and use the sale proceeds to reduce their new monthly loan payments.

Here’s how recasting your mortgage works and the pros and cons of recasting.

What is mortgage recasting?

Recasting your mortgage involves making a large payment toward the principal loan balance. Your mortgage lender will then re-amortize your mortgage with the lower balance to lower your monthly payment. Recasting can be a strategy used by mortgage borrowers who purchase a new home before they sell their current home. Once the home sells, they are able to use the proceeds to recast the mortgage they took out to buy the new home, which, in turn, lowers the amount of interest they have to pay over the life of the loan.

The strategy may also make sense for homeowners who come into a large inheritance, or receive a substantial bonus or stock windfall. Those funds can be used to make a lump-sum payment that will lower the monthly mortgage. What you cannot do is use equity from your home to recast. 

How does recasting a mortgage work?

With recasting, the only thing that changes with your mortgage is the amount you owe your lender. Your lender stays the same. So do the terms of the loan, including the interest rate you got when you took out the mortgage.

For example, suppose you borrowed $300,000 from a mortgage lender, and agreed to repay the loan over 30 years at 6.5% interest. Your mortgage payment over the next 30 years would be about $1,896 a month for principal and interest alone. (That is, it does not include property taxes or any required insurance.)

Now let’s say that after 10 years, you inherit $50,000 and decide to use those funds to lower your mortgage balance. By that point, you would have been paying down your mortgage for 10 years, so the balance at the time of the recast would be about $253,809. To recast it, you would first contact your lender to see if a recast is possible. If it is, the lender would typically charge you a few hundred dollars to recalculate your payments based on the lower amount you owe.

In the example above, your new balance would be $203,809 and your payment for the remaining 20 years on the loan would drop to $1,519. That’s a savings of about $377 on your monthly payment, and nearly $40,000 in saved interest charges over the remaining life of the loan.

You can use Zillow’s Amortization Calculator to determine your new monthly mortgage payment after recasting. 

Recasting vs making extra payments on the principal

Both recasting and making extra principal payments will lower the mortgage balance you owe your lender, but only recasting will lower your monthly payment. Here’s why.

When you take out a mortgage, your lender creates a repayment schedule where a share of every payment goes toward interest on the loan and a share goes toward paying down the balance. The early payments consist mostly of interest, but as you pay your mortgage over time, more of your payment goes toward lowering the balance until it’s paid off. 

When you pay a large lump sum to lower your balance in a recasting, your lender recalculates or “re-amortizes” your payment schedule to reflect the change in interest you’ll be charged on the smaller balance.

Making extra principal payments over time also lowers the balance you owe, but the lender does not recalculate the payment schedule. You still save money because you’ll be paying off the loan early, but the amount of your monthly payment for principal and interest doesn’t change until it’s paid off or sell your home.

How much does it cost to recast a mortgage?

Mortgage recasting typically costs a few hundred dollars, but can vary by lender.

How much can I save by recasting my mortgage?

You can determine how much you’ll save by recasting your mortgage based on the number of years you have left on your mortgage and how large of a payment you make. Putting down only a small amount won’t substantially lower your monthly payment, and that money could work harder for you in other investments.

But if you’re buying and selling a home at the same time, recasting could be a good option.

For example, let’s say you plan to sell your home and use the proceeds to buy a new home. If you find your new home before your old one sells, you won’t be able to put proceeds from the sale toward the new purchase.

In this case, you could take out a mortgage for a new home. Once your old one sells, you could approach your lender about using some or all of the sales proceeds to lower the balance on that new mortgage. If the lender agrees, the repayment schedule would be recalculated to reflect the smaller loan balance, and you’d end up with a smaller monthly payment.

Compared to refinancing, which can cost thousands, recasting is cheaper — typically only a few hundred dollars. And your loan schedule stays the same, instead of going back to square one as it would if you refinanced. However, the math can change pretty dramatically if you can get a lower interest rate by refinancing. 

In each case, the best way to see whether it’s worth recasting versus refinancing is to talk to your lender or do the math and compare.

Can anyone recast a mortgage?

Not every lender will allow you to recast your mortgage. Some lenders may require you to have a certain amount of equity in your home before they’ll allow you to recast your mortgage. And lenders typically require you to have a history — even a brief one — of on-time payments before they’ll allow you to recast your mortgage.

Also, some loan types cannot be recast. Government-backed loans from the Federal Housing Administration (FHA), the United States Department of Agriculture (USDA) and Department of Veterans Affairs (VA) cannot be recast, but you may be able to recast a conventional loan.  

Also, most lenders have a minimum amount you must pay down to recast, often $10,000 or a share of your remaining principal. 

Given the different standards, you should check with your lender to see what they require.

What are other ways to lower my payment?

Refinancing is the most common way to lower your mortgage payments. If you’re struggling to pay your mortgage, your lender may be willing to work with you to modify your existing loan, although that can lead to additional interest. The best way to answer this question for yourself is to contact your lender.

The decision to recast your mortgage or refinance depends on your circumstances, how much time you have left on your mortgage, and whether you can obtain a lower interest rate by refinancing. One upside to recasting your mortgage versus refinancing is that you avoid the credit qualifications and appraisal requirements that come with refinancing. And you could pay less interest on your mortgage if the new mortgage comes with a higher interest rate. 

Should I recast my mortgage? 

Some downsides to mortgage recasting are you won’t be able to access your home’s equity, your cash will be tied up in your home and you won’t be able to alter the interest rate or the term of the loan.

If you’re uncertain about whether to recast or refinance your mortgage, contact a lender to explore both options and see which is best for you.