Mortgage Recasting: A Powerful Tool for Homeowners
AInvestFriday, Jan 10, 2025 9:49 pm ET
4min read


Mortgage recasting, a lesser-known financial strategy, offers homeowners a unique opportunity to reduce their monthly mortgage payments and lower the overall interest paid over the life of the loan. By making a lump-sum payment towards the principal balance, borrowers can enjoy lower monthly payments without changing their interest rate or loan term. This article explores the concept of mortgage recasting, its benefits, and how it differs from refinancing.



What is Mortgage Recasting?

Mortgage recasting is a form of prepaying your mortgage. To recast your loan, you'll make a lump-sum payment towards the balance. Your lender will then reamortize the loan with the smaller balance and new, lower monthly payments. Although your loan has been recast, you'll retain the same interest rate and loan term.

How Does Mortgage Recasting Work?

The mortgage recasting process involves several steps:

1. Making a Lump-Sum Payment: The homeowner makes a sizable payment towards the principal balance of their mortgage. This payment is typically a one-time, large sum and can come from various sources such as savings, an inheritance, or a bonus from work.
2. Contacting the Lender: The borrower contacts their mortgage lender to request a recast. The lender will then review the request and determine if the borrower is eligible for recasting.
3. Recalculating the Loan: If approved, the lender will recalculate the loan based on the new principal balance, using the same interest rate and remaining loan term.
4. Providing the New Payment Schedule: The lender provides the borrower with a new payment schedule reflecting the lower monthly payments.



Mortgage Recasting vs. Refinancing

Mortgage recasting and refinancing are two different strategies for adjusting the terms of a home loan, each with its own advantages and disadvantages. Here's how they differ:

1. Process and Costs:
* Refinancing involves replacing your current mortgage with a new one, which typically requires closing costs, a new loan application, and a credit check. It can be costly and time-consuming.
* Recasting allows you to keep your existing loan but adjust the payment schedule based on a reduced principal balance. It doesn't require closing costs or a new loan application, and it doesn't restart the clock on your mortgage's duration. However, some lenders may charge fees for recasting.
2. Interest Rate and Loan Term:
* Refinancing can help you obtain a lower interest rate, shorten your loan term, or convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice versa.
* Recasting does not change your interest rate or loan term. You retain your current rate and term while benefiting from lower monthly payments.
3. Eligibility:
* Refinancing is eligible for most types of mortgages, but you'll need to meet certain credit and income requirements.
* Recasting is not available for all mortgage types. Some government-backed loans, such as FHA and VA loans, may not allow for recasting. Additionally, individual lenders may have their own restrictions and requirements.

Benefits of Mortgage Recasting

Mortgage recasting offers several primary benefits to homeowners:

1. Lower Monthly Payments: By making a lump-sum payment towards the principal balance, homeowners can reduce their monthly mortgage payments. This can provide relief to homeowners who need to reduce their housing expenses and free up cash flow for other financial goals or expenses.
2. Reduced Interest Paid Over the Life of the Loan: By making a lump-sum payment towards the principal balance, the overall interest paid over the life of the loan is reduced. This can potentially save the homeowner thousands of dollars in interest payments.
3. Potential for Faster Loan Payoff: With lower monthly payments, homeowners may choose to continue paying their original mortgage payment amount, thereby applying extra funds towards the principal balance and potentially paying off the loan faster.
4. Flexibility to Apply Extra Payments When Desired: Mortgage recasting allows homeowners to make extra payments towards their loan principal whenever they have the financial means to do so, providing flexibility in managing their mortgage debt.
5. No Change to Loan Terms (Interest Rate, Loan Length): Recasting a mortgage does not change the interest rate or loan length, allowing the homeowner to maintain their current loan terms while benefiting from lower monthly payments.

Mortgage recasting can be a powerful tool for homeowners looking to reduce their monthly mortgage payments and lower the overall interest paid over the life of the loan. By understanding the process and its benefits, homeowners can make informed decisions about whether mortgage recasting is the right choice for their financial situation.
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