What Is a Mortgage Recast? The Mortgage Option Many Homeowners Don’t Know About

Have you ever learned something and immediately thought, “Why didn’t anyone tell me this sooner?”

That happened with a client of mine recently. We were talking about mortgages when the subject of a mortgage recast came up.

The reaction was pretty much what you’d expect: Wait. You can do that?

A lot of homeowners have never heard of mortgage recasting. Yet, in the right situation, it may be worth asking your lender about.

Before we go any further, an important note: I’m a real estate broker, not a lender or financial advisor. Loan programs and lender requirements vary. This is meant to help you know what questions to ask your mortgage lender.

What Happens If You Put a Large Lump Sum Toward Your Mortgage?

Here’s where a lot of the confusion starts.

Suppose you suddenly have $50,000 available. Maybe you sold another home, received an inheritance, or simply have savings you want to put toward your mortgage.

You send that $50,000 to your mortgage company and apply it to the principal.

Your loan balance goes down.

But does your required monthly mortgage payment automatically go down too?

Usually, no.

Your payment is generally still based on the original loan schedule. By reducing the principal, you may pay the loan off sooner and reduce the amount of interest you pay over time, but your required monthly principal and interest payment doesn't automatically change.

That's where a mortgage recast comes in.

What Is a Mortgage Recast?

A mortgage recast is when your lender recalculates your monthly principal and interest payment after you make a significant payment toward your loan balance.

The lender takes your new, lower principal balance and re-amortizes it over the remaining term of your loan.

The key difference is that you aren't replacing your mortgage with a new one.

You generally keep:

• Your existing mortgage
• Your existing interest rate
• Your remaining loan term

What changes is the amount of principal and interest you're required to pay each month.

Mortgage Recast Example

Here's a simplified example.

Let's say you owe $250,000 on your mortgage and then put $75,000 toward the principal.

Now you owe about $175,000.

Without a recast, your required monthly principal and interest payment may remain the same.

If your lender allows you to recast the mortgage, it can recalculate your payment based on that lower $175,000 balance and the time remaining on your loan.

The result could be a lower required monthly payment.

The actual amount will depend on your loan, interest rate, remaining term, and your lender's rules.

Mortgage Recast vs. Refinancing

This is an important distinction.

With a mortgage refinance, you're taking out a new mortgage to replace the old one. Your interest rate, loan term, monthly payment, and other loan terms may change. Refinancing can also involve closing costs and a new approval process.

A mortgage recast works with your existing mortgage.

That can be especially interesting to homeowners who already have an interest rate they don't want to give up.

For example, if you bought or refinanced when mortgage rates were lower than today's rates, refinancing solely to lower your monthly payment may not make sense.

A recast may provide another option if your loan qualifies.

Why Would Someone Want to Recast a Mortgage?

One reason I find mortgage recasting interesting is flexibility.

Let's say your current required principal and interest payment is $1,800 per month. After putting a large amount toward the principal and completing a recast, your required payment drops.

That doesn't mean you have to start paying less.

If it works for your finances, you could continue paying the same $1,800 you were paying before. The extra amount would generally go toward reducing the balance faster, subject to your loan terms.

But now you may have a lower required payment.

If an unexpected expense comes along, your income changes, or you simply want more room in your monthly budget, you aren't committed to that higher payment.

Could a Mortgage Recast Help When Buying Before You Sell?

This is one situation where I think homeowners should at least know the term.

Some homeowners want to buy their next home before selling their current one.

They may use financing to purchase the new home and then receive a large amount of cash after their previous home sells.

Depending on the mortgage, the homeowner may be able to apply some of those proceeds to the new mortgage and ask the lender about a recast.

That doesn't mean buying before selling or recasting is the right financial strategy for everyone. There are several financial and timing issues to consider.

But knowing the option exists can help you have a much better conversation with your lender before deciding how to structure the purchase.

Does Every Mortgage Qualify for a Recast?

No.

This is the part you don't want to skip.

Not every type of mortgage can be recast, and lenders can have different requirements. There may be a minimum lump-sum payment, a fee, timing requirements, or other restrictions.

That's why I wouldn't assume your mortgage qualifies based on something you read online or heard from a friend.

Ask your lender directly.

The Question to Ask Your Lender

If you're considering putting a large amount of money toward your mortgage, add this question to your list:

“Does my loan qualify for a mortgage recast, and what are your requirements?”

Ask that question before sending the money.

Your lender can explain whether your particular loan is eligible, how much you would need to pay toward the principal, what fees may apply, and what your new payment could look like.

Sometimes Knowing the Right Question Makes All the Difference

Real estate and mortgages come with a whole vocabulary most of us don't learn until we need it.

Mortgage recasting is a good example.

You don't need to become a mortgage expert. You just need to know enough to ask the right people the right questions.

If you're thinking about selling your current home and buying another in Ashland County or the surrounding North Central Ohio area, I can help you work through the real estate side of that decision and coordinate with your lender so you understand your options before making a move.

Wendy Anderson, Broker/Owner
NextHome Next Stepp
Seniors Real Estate Specialist® (SRES®)

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