What Is Mortgage Loan Recasting?

If your current mortgage payment is more than you can comfortably manage, mortgage loan recasting may be a good option. Here, we break down exactly how mortgage loan recasting can lower your monthly mortgage payment, making it easier to pay each month.

How mortgage loan recasting works

In the event you find yourself with a chunk of money, mortgage loan recasting allows you to pay down your mortgage principal and save money by reducing the monthly payment on the remaining balance.

A simple way to view a mortgage loan recasting is to think of it as a do-over. You pay the same mortgage interest rate you had before and recalculate the loan using the same repayment terms. The only thing that changes is the amount financed and your monthly payment. Because you owe less money after making a lump-sum payment, you also end up paying less interest over the life of the loan. The ability to pay less interest may be the most attractive feature of a loan recast.

If you instead put that same money toward the loan principal each month, you would still lower the amount you owe but -- unlike recasting -- the monthly payment would remain the same.

Mortgage loan recasting details

Although it can take 45 to 60 days for a mortgage lender to complete a recast, it is a relatively straightforward process. Conveniently, as long as your mortgage loan is in good standing, the lender will not require a credit check, home appraisal, or income verification.

Mortgage loan recasting is only available on conventional loans, and is not an option for FHA, VA, or USDA loans. Jumbo loans are usually ineligible. Most -- although not all -- lenders offer mortgage loan recasting. After all, making a mortgage recast easy for existing customers is one way to prevent them from refinancing the mortgage with another lender. The only way to find out for sure whether your lender offers mortgage recasting is to give the company a call.

The amount of money you'll need to put toward recasting is typically at least $10,000, depending on the lender. What's important is that your original loan term and interest rate remain the same. For example, if you have a 30-year mortgage at a 3.7% interest rate and recast it after five years, the balance will be re-amortized over the remaining 25 years using the same rate.

Once you apply for a mortgage loan recast, your lender will likely require you to make two consecutive payments (at your original payment amount) before it recasts the loan. That said, you should keep making your regular payments until you hear from your lender.

You can recast your loan as many times as you would like but should remember to plan for recasting fees in the vicinity of $250 to $300.

Pros of mortgage recasting

In addition to lowering your monthly mortgage payment, here are some reasons you may want to explore mortgage loan recasting.

• If the interest rate has risen since you took out your original mortgage, you'll be able to hold onto that lower rate.
• You will pay less in interest overall due to a smaller principal amount.
• You can lower your monthly mortgage payment without extending the length of the loan.

You can also build yourself an emergency cushion by recasting your mortgage and continuing to make your original payments. Doing so will reduce your principal balance even further and if you run into financial difficulty, you can switch to the lower payments until you are back on a solid footing.

Cons of mortgage loan recasting

While there are specific circumstances under which it makes financial sense to recast a mortgage, recasting is not without its drawbacks.

• If your current mortgage rate is high, it does not make financial sense to recast at the same rate. Look into refinancing your mortgage instead to see if you can benefit from the lower rates. If you like your current mortgage servicer, ask them what the interest rate would be if you refinanced the existing mortgage through them.
• It is possible to become house rich and cash poor by putting all your funds into home equity, leaving little cash for other important goals.
• If you carry high-interest debt (like credit card debt), putting a lump sum toward your mortgage -- instead of your other debt -- could be an expensive mistake. The smart move is to pay off credit card debt and other high-interest loans first.

Alternatives to mortgage loan recasting

If your goal is to use a lump sum of money in the wisest possible way, mortgage loan recasting is only one option. Here are others worth consideration:

• Pay a little extra toward your mortgage principal each month. It won't lower your monthly obligations immediately but will help you retire the debt earlier and can save thousands in interest payments.
• Refinance your mortgage by taking out a new loan to pay off the old one. Refinancing may be your best option if the current interest rate you qualify for is lower than your original rate. While mortgage loan recasting simply recalculates your payment based on the new, lower principal amount, refinancing is a lot like taking out a new mortgage. You may be required to pay application, credit, origination, flood certification, title search, and recording fees. You will also be required to have a new home appraisal, and possibly another home inspection. Again, if you have a good relationship with your current lender, check their interest rate as you rate shop. Use our mortgage interest calculator to see how a change in interest rates may impact your monthly payment.
• Use the money to invest in the stock market. This could provide a higher rate of return in the long run.
• Build an emergency fund with enough money to pay three to six months' worth of bills. That way you know you have cash in reserve to get you over any future bumps in the road and can focus on other, more important things.

Mortgage loan recasting may not be a process you are familiar with, but it should be. It's good to have as many tools in your financial arsenal as possible. And recasting may be a good way to reduce your overall mortgage costs and your monthly payments.

Still have questions?

Here are some other questions we've answered:

• What Is Mortgage Loan Modification?
• What Is a Mortgage Prepayment Penalty?
• What Is a No-Closing-Cost Refinance?