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What Is Mortgage Recasting?

7-minute read

Do you have a large sum of money you’d like to put toward your mortgage? If so, you might want to consider recasting your loan.

We’ll walk you through the recasting process and show you some of the benefits of a recast. In addition, we’ll compare recasting to refinancing and help you decide which option is right for you.

How Does Mortgage Recasting Work?

When you recast your mortgage, you make a large lump-sum payment to your lender. This money goes toward your loan’s principal balance and reduces the amount you owe. Your lender then changes your amortization schedule and you’ll be able to make a new monthly payment. However, your payment and principal balance are the only things that change after your lender recasts your loan. You can’t change your loan term or interest rate through a recast.

Homeowners who recast their loans enjoy a lower monthly payment and save money on interest over time. A recast can be a powerful tool if you’ve recently earned or inherited a large sum of money. Let’s take a closer look at how a mortgage recast might affect what you pay for your loan.

Let’s say you have a 30-year mortgage loan with a $200,000 principal balance and a 4% APR. With this loan, your monthly payment is $954.83 before taxes and insurance. By the time you make the last payment on your loan, you will have paid a total of $143,738.99 in interest.

Now, let’s say that you inherit $50,000 and you decide that you want to put the money toward your mortgage loan without changing your rate or term. You speak to your lender and decide that a recast is your best option. You pay your lender the $50,000 as well as a small recasting fee of $100. From there, your lender calculates a new amortization schedule for your loan. An amortization schedule is a table that lists each regular payment on a mortgage over time. You usually don’t need to worry about appraisals, submitting financial documents or credit checks when you recast like you would if you had refinanced your loan. You’ll receive a notification and information on your new monthly payment once your lender finishes recasting your loan.

In this example, your new monthly payment would be $716.12. By the time your loan matures, you’d pay $107,804.26 in interest to your lender. This means that you lower your monthly payment by over $200 and save more than $35,000 in interest over the course of your loan. That said, your mortgage term and interest rate stay the same, as does your payment method and lender.

Recasting is an ideal solution for homeowners who want to reduce their principal balance and lower their monthly payment. You can put a lump-sum payment toward your principal balance without a recast, but this won’t change your monthly payment. Recasting is also more affordable than refinancing because you don’t need to pay for the typical refinancing closing costs like a credit check or appraisal. However, there are more restrictions on who can recast their loans and when they qualify. We’ll go over these limitations in the next section.

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How Do I Qualify For Mortgage Recasting?

Not everyone qualifies to recast their loan. All of the following conditions must be true before you can recast your loan:

  • You must not have a government-backed loan. You can’t recast an FHA, USDA or VA loan under the current government rules. Most jumbo loans are also excluded from recasting. If you want to change your government-backed loan or jumbo loan terms, you’ll need an FHA, VA, USDA or jumbo loan refinance.
  • Your current lender must offer recasting. Not every lender offers recasting. Contact your lender and ask if it’s an option for you.
  • You must meet minimum principal reduction standards. Most lenders require that you have a minimum amount of money to put toward your loan before you qualify for a recast. Your lender might have their minimum set as a dollar amount, or you might need to have at least a certain percentage of the principal. Most lenders require that you have at least $5,000 to put down before you recast. There’s no minimum lump sum payment required with Rocket Mortgage®.
  • You must meet equity requirements. You may need to already have a certain amount of equity in your loan before you qualify for a recast. Like your minimum principal reduction, you may see this requirement as a set dollar amount or a percentage of your principal balance. For example, recasting with Rocket Mortgage® may mean that you need to reduce your principal balance by at least $10,000 in the year prior to your recast to qualify.
  • You must be able to pay a recasting fee. Most lenders charge a small recasting fee in exchange for servicing your request. However, these fees are much lower than the closing costs you pay when you refinance. For example, Rocket Mortgage® charges a $100 fee to recast your loan.
  • You must meet your lender’s payment history requirements. Your lender might require that you have a history of on-time payments before you can recast. For example, Rocket Mortgage® requires that you have at least two consecutive on-time payments on your current loan before you recast. 

Keep in mind that individual standards can vary by lender. Not sure if you qualify for a recast? Contact your lender and ask about the standards you must meet.

So, what can you do if you don’t qualify for a recast? You can still pay off your principal and change your monthly payment through a refinance.

Should I Recast Or Refinance My Mortgage?

Recasting your mortgage isn’t the same as refinancing it. You change your loan directly through your lender when you recast. You replace your current mortgage loan with a new loan when you refinance. This gives you more freedom to change the terms of your loan and work with a different lender if you so choose. Refinances also cost more than recasting your loan.

Let’s take a look at some of the benefits of both refinancing and recasting and how you can get started.

Recasting Your Mortgage

First, let’s go over some of the benefits of recasting your loan.

  • Recasting is less expensive. You don’t need to budget for closing costs when you recast your loan. Instead, you typically just pay a small flat-rate recasting fee.
  • There are no credit or appraisal requirements. Unlike a refinance, you don’t need to meet credit score requirements to recast your loan. You also don’t need to worry about waiting for an appraisal.
  • You can keep your current interest rate. A recast can allow you to keep your current interest rate if interest rates are higher now than when you got your loan. When you refinance, you usually have to accept the current market rate.
  • You can save on interest and lower your payment. A recast can be the perfect solution if you have a large amount of money to put toward your loan but you aren’t sure how your income will change in the future. Recasting allows you to save on interest without taking on a higher monthly payment.
  • You apply your lump sum directly to the principal. Some lenders don’t allow you to apply extra payments to your loan principal. Instead, your lender might automatically apply any extra money you put toward your loan to next month’s payment instead of the principal. Though this will get you ahead on your payment, it won’t save you any money on interest. Ask your lender if they offer recasting in the event that they don’t allow you to apply the money directly to the principal.

Keep in mind that a mortgage recast can take between 45 to 60 days to complete. During this time it’s crucial that you continue to make your regular monthly loan payments. Put aside at least 2 months’ worth of payments before you recast. As soon as you get your first billing statement from your lender that confirms your lower monthly payment, you can switch to your new schedule.

Each individual lender has its own standards you need to meet before you qualify. Get in touch with your lender and ask how you can begin the recasting process.

Refinance Your Mortgage

Now, let’s take a look at some of the benefits of refinancing.

  • You can change your loan. You have the option to change the terms of your loan when you refinance. You can shorten your term, lengthen it, take a lower interest rate and even refinance to a new loan type. For example, to remove insurance, many homeowners refinance their FHA loans to conventional loans as soon as they reach 20% equity. You can’t change anything but your principal when you recast your loan.
  • It’s available for more mortgage types. You can refinance any type of mortgage loan. Refinancing may be your only option to change your monthly payment if you have a government-backed loan or a jumbo loan.
  • You can choose a new lender. Unsatisfied with your current lender? You can refinance your mortgage loan with a new one.

The first steps to refinancing your loan involve checking out lenders in your area and researching current interest rates. Once you find a lender you want to work with, apply through their system. Your lender will then follow up to help you schedule an appraisal if necessary and finish the underwriting process.

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Summary

You pay a lump sum toward your principal when you recast a mortgage loan. In exchange, your lender recalculates your payment schedule and you make a lower monthly payment. Recasting your loan is different than refinancing. When you recast, you don’t need to worry about credit checks, appraisal or financing closing costs. However, there are more restrictions on recasts than refinances.

Refinancing is different. You replace your current loan with a new loan that has better terms. Refinancing allows you to change your loan’s interest rate, term or loan type. You can’t get a recast if you have a government-backed loan. However, you can refinance a government-backed loan if you need a lower payment. Refinancing also allows you to choose a new lender if you don’t like your current service provider.

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