Could a mortgage recast lower your monthly payment?
If you’ve recently received a financial windfall, perhaps from a bonus, the sale of a home, or an inheritance, you may be considering the best way to put that money to work. One option that often flies under the radar is a mortgage recast.
In this article, we’ll explain how mortgage recasting works, how it compares with refinancing, and what to consider when deciding whether it’s the right financial move for you.
What is a mortgage recast?
A mortgage recast occurs when you make a large lump-sum payment toward your principal balance. Afterwards, your lender will recalculate your monthly payment based on what you now owe. During the recasting process, neither your interest rate nor your loan term with change. Only your monthly principal and interest payment drops since you now owe less overall. It’s also important to note that this does not change any escrowed portion the payment may have.
Recasting tends to be the most common with conventional loans. Government-backed loans (FHA, VA, USDA) generally don't qualify, so check with your lender first.
How does a mortgage recast work?
The process of recasting your mortgage is pretty simple! Here are the steps you’ll want to follow:
- First and foremost, ask your lender if your loan qualifies.
- Figure out the minimum lump sum. Most lenders require at least $5,000 to $10,000. Our principal payment is required to be the greater of $5000 or 10% of the outstanding principal balance.
- Keep in mind that a one-time administrative fee of around $150 to $500 will also be required. At Clearview, our specific admin fee is $300. We also require a signed modification agreement and the local county set recording fee.
- Make your lump-sum payment which will go directly toward your principal. At Clearview, we require this payment to be made directly to Real Estate (not digitally or in a financial center) in certified funds. The payment has to be made no more than 60 days from the expected payment change date.
- Receive your new payment! Your lender will recalculate your monthly amount based on the lower balance.
What's the difference between a mortgage recast vs. refinancing?
Mortgage recasting and refinancing can both lower your monthly payment, but they work in very different ways.
Unlike a recast, refinancing replaces your current mortgage with a new loan. This gives you the opportunity to change your interest rate, loan term, or loan type and, in some cases, access your home equity. Refinancing also typically involves an application, underwriting, and closing costs.
In summary, a recast makes sense when you're happy with your current rate and want a simpler, cheaper way to lower your payment. Refinancing is better when today's rates are significantly lower than yours.
Should I consider a mortgage recast?
Recasting isn’t right for everyone! Let’s discuss some scenarios when this process makes financial sense and when it may not.
It may be a great fit if you:
- Have a lump sum available, such as a bonus, tax refund, or proceeds from a home sale
- Like your current interest rate and don't want to lose it
- Want more room in your monthly budget for saving or investing
It may not be the right move if you:
- Don't have a solid emergency fund. It’s recommended to keep roughly three to six months of expenses set aside before tying up cash in your home.
- Carry high-interest debt as paying that down first may save you more.
- Want to pay off your loan faster. Extra principal payments without recasting will shorten your term instead.
Before deciding, you should also ask yourself: Will I still have enough savings after this payment? What would I do with the extra money each month? How long do I plan to stay in this home? Your answers will help you determine if a recast truly supports your bigger goals.
Summarizing a mortgage recast
A mortgage recast is great to lower your monthly payment by putting a lump sum toward your principal. It's not the right fit for everyone, but if you have the cash and a rate you want to hold onto, it's well worth exploring.
Start by contacting your lender to confirm eligibility. From there, run the numbers and weigh your options. We're here to help you make confident, informed decisions every step of the way.
