This lesser known alternative to refinancing can lower your monthly loan payments without the hassle of a credit check.
A recast mortgage lowers your monthly payment by restructuring, or reamortizing, your loan
After you make a lump-sum payment, the lender recalculates your payment over the same loan term
Only refinancing — not recasting — can lower your mortgage rate
Lenders typically let you to recast a loan multiple times
Homeowners who want to lower their mortgage payments might be able to do so by recasting the mortgage. A mortgage recast restructures your loan so that the remaining balance is spread out over the rest of the loan term. But you can only recast a mortgage after you make a one-time lump sum payment towards your mortgage principal, similarly to when you made a down payment when you first took out the mortgage.
If you can afford it, or have enough extra funds (perhaps from an inheritance), you can put the money toward your loan balance to reduce the total amount of interest you’d pay over the course of your loan. A lesser-known alternative to refinancing, a recast mortgage is a more straightforward mortgage restructuring that can be an attractive way to save on monthly payments. (Unlike refinancing, recasting doesn't require a credit check or appraisal.) However the financial benefits and exact savings you get from a recast mortgage will depend on your circumstances. You typically need to make a very large lump sum payment to reap any benefits.
If you're thinking about a mortgage recast, first make sure that you have the right kind of loan. Only certain kinds of mortgages can be recast. Government-backed loans like FHA and VA mortgages cannot be recast, while conventional loans and nonconforming loans, like a jumbo mortgage, can only be recast on a case-by-case basis.
Here are your steps to recasting a mortgage:
Mortgage recasts are not always advertised by the loan servicer. Some don't allow recasting at all, while others may voluntarily extend you an offer once you’ve paid off a chunk of the mortgage principal. Mortgage lenders may also charge a recasting fee of $200 to $500, which is typically recouped after a few months of payment.
Once you get a greenlight from the lender, you’ll pay a lump sum of cash on your mortgage. The bigger the lump sum you pay towards mortgage recasting, the greater the reduction in your monthly payment. Some lenders may have a required minimum for the lump sum payment.
A mortgage recast causes the loan to reamortize. Based on your newly reduced loan balance, the lender will calculate a new monthly payment schedule. In almost all cases, you’ll end up with a lower payment. You’ll also pay less interest over time although your rate itself won’t change. Because recasting can take time to process, remember to make your usual mortgage payments until the account reflects the new payment amount.
A recast might sound like you’re just paying down the principal with an especially large payment. But recasting a mortgage actually isn’t the same thing as making extra payments or prepayments on your loan.
If you pay a lump sum on your own without recasting, you have effectively lowered your mortgage principal, but not your monthly payment. That’s because when you make these extra payments, no amortization or restructuring of the loan occurs. You’ll simply have put yourself ahead of your repayment schedule, so you could potentially pay off the loan sooner, although your monthly mortgage payments will be the same until then. A mortgage recast, on the other hand, will not decrease your term length, but it will reduce your monthly payments.
The biggest takeaway when considering a recast mortgage is that it will not lower your mortgage rate or shorten the remaining loan term. If you are looking to pay off your mortgage faster, you can still make bigger payments to pay down the principal after the recast. (Read our guide to paying off your mortgage in five years.
But if you want smaller monthly payments, a recast mortgage could be right for you. Let's look at an example of how much you'd pay before and after mortgage recasting.
With a 30-year, fixed-rate mortgage with a $400,000 principal amount and 4.5% interest rate you would pay a $2,027 monthly payment. After five years of steady payments and a large injection of cash of about $8,500, you reduce your principal loan to $356,000. With a recast you will be responsible for a $1,978 monthly payment for the remaining 25 years of the term.
(We got the figures using our mortgage calculator. Since a recast mortgage is simply a reamortized loan, you can figure out your new payments by inputting a new mortgage loan amount and changing the term.)
A recast mortgage is a good idea only if you think the decrease in monthly payments is worth the lump sum you paid up front. Some homeowners may find the savings from recasting a mortgage too small to be worth it and choose to find a better use for their money.
If you have extra cash, instead of putting it towards a recast mortgage, you might first consider paying off any outstanding debts, like student loans or credit cards, or building an emergency fund. You may even prefer to see the money grow. (Learn how to invest 100k). Everyone’s financial situation is different.
At a glance here are the benefits of recasting:
And the disadvantages:
If you’re trying to decide between recasting of refinancing your mortgage, you need to decide what your financial goals are. Both of these mortgage products can result in lower monthly payments, but everything else about them is different. Recasting is straightforward, while refinancing gives borrowers a couple different options about what happens to their mortgage.
Refinancing a mortgage happens when you get a new mortgage to buy out your old one. It’s a common option primarily for borrowers seeking to lower interest rates, shorten term lengths, or change other loan features, like going from an adjustable-rate mortgage to a fixed-rate one.
A refinance requires you to go through the hoops of applying for a mortgage all over again by getting a credit check and appraisal, since you’re getting an entirely new loan. If your financial standing has changed — for example, if your credit score plunged or your loan-to-value-ratio has gone up — since you first took out the current mortgage, then you may have trouble getting a good deal when refinancing. A mortgage recast, on the other hand, doesn’t require any financial assessment.
You can get a lower interest rate with a mortgage refinance, but you might pay more interest in the long run, since you’re restarting a loan term from scratch with a brand new mortgage. However, when mortgage rates are low, like they are now, refinancing can be worth it. (For example, if you refinance your mortgage at a 3.65% fixed rate for the $356,000 remaining loan balance in the above scenario, your new monthly payment would be $1,629 for 30 years.) Check out our weekly analysis of mortgage rates for more information.
Look at the chart below to see the general differences between a recast mortgage vs refinance. Note that neither recasting a mortgage nor refinancing it would lower other costs of homeownership, like property taxes or homeowners insurance. (If your homeowners insurance rates have increased, you can try reshopping your policy. Policygenius can give you quotes.)
|Mortgage recasting||Mortgage refinancing|
|Lowers monthly payments||Can lower monthly payments|
|Keeps interest rate the same||Lowers interest rate|
|Keeps term length the same||Can change term length|
|Cannot change loan type||Can convert loan type|
|No credit check||Credit check and application|
|Lower fees that recoup easily||Higher fees (closing costs)|
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Elissa is a personal finance editor at Policygenius in New York City. She writes about estate planning, mortgages, and occasionally health insurance. In the past she has written about film and music.
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