Homeowners sometimes find themselves with a large amount of money they could put toward their mortgage. This might come from selling another property, receiving an inheritance, getting a large bonus, or simply building up substantial savings.
One option is to use that money to make a large principal payment and then recast the mortgage.
A mortgage recast can reduce the required monthly principal and interest payment without replacing the existing mortgage with a new loan. For some homeowners, this can be an attractive alternative to refinancing.
However, a recast is not the right solution for everyone.
Understanding how mortgage recasting works, what it costs, and when it may make sense can help Colorado homeowners determine whether it fits their financial goals.
What Is a Mortgage Recast?
A mortgage recast is a process that allows a homeowner to make a substantial payment toward the principal balance of an existing mortgage and then have the lender recalculate the monthly payment based on the lower balance.
The interest rate and remaining loan term generally stay the same.
For example, imagine you have a mortgage with a $400,000 remaining balance. You make a $100,000 principal payment, reducing the balance to $300,000.
With an eligible mortgage recast, the lender may recalculate the required monthly principal and interest payment based on the new $300,000 balance.
You keep the existing mortgage instead of replacing it with a new loan.
How Does a Mortgage Recast Work?
The process generally involves several steps.
Make a Large Principal Payment
First, the homeowner makes a substantial payment toward the mortgage principal.
The amount required can vary by lender and loan program.
Request the Recast
After making the principal payment, the homeowner requests a mortgage recast from the loan servicer or lender.
Not every mortgage is eligible, so it is important to confirm eligibility before sending a large payment with the expectation that the monthly payment will be recalculated.
The Lender Recalculates the Payment
The lender uses the new lower principal balance and the remaining loan term to calculate a new required principal and interest payment.
Because the outstanding balance is lower, the required payment can decrease.
Continue Making the Mortgage Payment
The homeowner continues making payments under the newly calculated schedule.
The interest rate generally remains unchanged, which is one of the major differences between a recast and a refinance.
Does a Mortgage Recast Lower Your Interest Rate?
No.
A mortgage recast generally does not change your existing interest rate.
Instead, it reduces the principal balance and recalculates the required payment based on that lower balance.
For example, if you currently have a mortgage at 6.50%, a recast generally does not turn that 6.50% rate into a lower rate.
This distinction is important because homeowners sometimes confuse recasting with refinancing.
A refinance replaces the existing mortgage with a new loan. A recast generally keeps the existing mortgage in place.
Mortgage Recast vs. Refinance
A mortgage recast and refinance can both potentially reduce a homeowner’s monthly payment, but they work differently.
Mortgage Recast
With a recast:
- You make a large principal payment
- Your existing mortgage remains in place
- Your interest rate generally stays the same
- Your remaining loan term generally stays the same
- Your required monthly principal and interest payment is recalculated
Mortgage Refinance
With a refinance:
- You replace the existing mortgage with a new loan
- You may receive a different interest rate
- You may change the loan term
- You may have closing costs
- You may need to go through a new qualification process
The better option depends on your financial situation and what you are trying to accomplish.
When Does a Mortgage Recast Make Sense?
A recast may make sense when you have a significant amount of money available and want to reduce your monthly mortgage payment without replacing your current loan.
Potential situations include:
- Receiving an inheritance
- Selling another property
- Receiving a large work bonus
- Using accumulated savings
- Selling an investment
- Receiving proceeds from another financial transaction
For example, a homeowner may have purchased a home before selling their previous property. After the previous home sells, they may have substantial proceeds available that could be applied toward the new mortgage.
Instead of refinancing, the homeowner could ask whether the mortgage is eligible for a recast.
Can You Recast Your Mortgage After Selling Your Previous Home?
Potentially.
This can be particularly relevant for homeowners who move before selling their existing property.
Suppose you purchase a new home and later sell your previous home for a significant amount of money.
If the new mortgage is eligible for a recast, you may be able to use some of the proceeds from the previous home sale to reduce the principal balance and then request a recalculation of the monthly payment.
This can create a lower required payment without requiring a new mortgage.
However, homeowners should consider how much money they want to keep available for other financial goals before making a large lump-sum payment.
Can an Inheritance Be Used for a Mortgage Recast?
An inheritance may provide the funds needed for a substantial principal payment.
If you inherit a large amount of money, you may be able to use some of those funds to reduce your mortgage balance.
Whether the mortgage can then be recast depends on the loan and servicer requirements.
Before making the payment, confirm with your mortgage servicer that:
- The mortgage is eligible for a recast
- The required principal payment is met
- The payment will be applied correctly
- The recast process is available
- Any applicable fee is understood
This can help prevent an unexpected situation where you make a large principal payment but do not qualify for the payment recalculation you expected.
How Much Does a Mortgage Recast Cost?
The cost of a mortgage recast varies by lender and loan servicer.
Some lenders may charge a relatively small administrative fee, while others may have different requirements.
The cost is typically much lower than the closing costs associated with many refinances, but you should always confirm the actual fee before moving forward.
Ask your mortgage servicer:
- Is there a recast fee?
- How much is it?
- Is there a minimum principal payment?
- What documentation is required?
- How long does the process take?
- When will the new payment begin?
Knowing these details can help you compare a recast with other options.
Is There a Minimum Amount Needed to Recast a Mortgage?
There may be.
The minimum principal reduction required for a recast can vary by lender, loan type, and servicer.
For example, one mortgage may require a particular minimum lump-sum payment before the lender will recalculate the payment, while another loan may have different requirements.
Do not assume that making a small extra principal payment automatically qualifies you for a recast.
Ask your loan servicer about the specific requirements for your mortgage.
Does a Mortgage Recast Change the Loan Term?
A recast generally does not restart the mortgage term.
For example, suppose you have 24 years remaining on a 30-year mortgage.
After making a large principal payment and completing a recast, you generally continue with the existing remaining term rather than starting a new 30-year loan.
This is another major difference between a recast and refinancing.
A refinance can involve selecting a new loan term, while a recast generally keeps the existing loan structure.
Can a Mortgage Recast Save Money?
It can potentially reduce the amount of interest paid over the remaining life of the mortgage because the outstanding principal balance becomes smaller.
However, the primary benefit many homeowners seek is a lower required monthly payment.
The actual savings depend on:
- Original loan balance
- Remaining principal
- Amount of the lump-sum payment
- Interest rate
- Remaining loan term
- Timing of the recast
- Any applicable fees
Making a large principal payment can also reduce the amount of interest that accrues over time because interest is generally calculated based on the outstanding balance.
Should You Use All Your Savings to Recast Your Mortgage?
Not necessarily.
Putting a large amount of money toward your mortgage can lower your balance, but homeowners should consider their broader financial situation first.
Before using a large amount of savings for a recast, consider whether you have enough money available for:
- Emergency expenses
- Home repairs
- Property taxes
- Insurance
- Retirement savings
- Investments
- Other financial obligations
A lower mortgage payment can be valuable, but having insufficient liquid savings can create problems if an unexpected expense occurs.
The decision should be based on your overall financial plan rather than the desire to lower the mortgage payment alone.
What Are the Advantages of a Mortgage Recast?
A recast can offer several potential advantages.
Lower Monthly Payment
The most obvious benefit is a lower required principal and interest payment.
Keep Your Existing Interest Rate
You generally do not have to replace your existing mortgage with a new interest rate.
This can be especially valuable if your current rate is lower than current market rates.
Avoid a Full Refinance
A recast can potentially reduce the payment without going through the entire refinance process.
Potentially Lower Interest Costs
Reducing the principal balance can reduce the amount of interest paid over the remaining life of the loan.
Keep the Existing Loan Structure
The existing mortgage generally remains in place rather than being replaced with a new loan.
What Are the Disadvantages of a Mortgage Recast?
A recast is not ideal for every homeowner.
Potential disadvantages include:
You Need a Large Amount of Cash
The primary requirement is usually having enough money available to make a substantial principal payment.
Your Interest Rate Does Not Change
If your primary goal is obtaining a lower interest rate, a recast may not accomplish it.
Not Every Mortgage Is Eligible
Eligibility depends on the loan and servicer.
Your Money Becomes Tied Up in Home Equity
Once you use a large amount of cash to reduce your mortgage balance, that money is no longer as liquid.
The Monthly Payment Reduction May Be Smaller Than Expected
The amount your payment decreases depends on the size of the principal reduction and remaining loan term.
Is a Mortgage Recast Better Than Refinancing?
There is no universal answer.
A recast may be attractive if you already have a favorable interest rate and have a large amount of cash available.
A refinance may make more sense if current rates are significantly lower than your existing rate or if you want to change your loan term or structure.
For example, a homeowner with a very low existing interest rate may not want to replace that loan simply to reduce the monthly payment.
A recast could allow them to reduce the principal balance while keeping the existing rate.
On the other hand, a homeowner with a high interest rate may benefit more from exploring refinance options.
What If Mortgage Rates Have Changed Since You Bought Your Home?
Current mortgage rates can influence the decision between recasting and refinancing.
If your existing rate is significantly below current market rates, replacing the loan could potentially make little sense solely to reduce your payment.
A recast may provide another way to reduce the required payment while preserving the existing rate.
If current rates are lower than your existing mortgage rate, however, refinancing may deserve consideration.
The right choice depends on the numbers and your long-term plans.
Can You Recast a Conventional Mortgage?
Some conventional mortgages may be eligible for recasting, but eligibility depends on the specific loan and servicer.
You should contact your mortgage servicer to confirm:
- Whether your loan is eligible
- The minimum principal reduction
- Any applicable fees
- Required documentation
- Processing time
- How the new payment will be calculated
Do not assume that all conventional mortgages have identical recast rules.
Can FHA, VA, or USDA Loans Be Recast?
Eligibility can vary significantly by loan program and servicing rules.
Borrowers with government-backed mortgages should not assume that a standard recast option is available.
If you have an FHA, VA, or USDA mortgage and are considering a large principal payment, contact your loan servicer first.
They can explain whether your specific mortgage allows a recast and what alternatives may be available.
How a Mortgage Recast Can Fit Into a Colorado Homeowner’s Financial Plan
Colorado homeowners may experience a variety of financial situations that result in access to additional cash.
For example, homeowners may move between properties, receive proceeds from a home sale, or build substantial savings over time.
A mortgage recast can be one option for homeowners who want to use a portion of those funds to reduce their mortgage balance and monthly payment.
However, Colorado homeowners should also consider property taxes, homeowners insurance, maintenance costs, and other expenses when deciding how much money to keep available.
Reducing the mortgage payment can be helpful, but maintaining sufficient liquidity is also important.
Talk With a Mortgage Professional Before Making a Large Principal Payment
If you are considering using a large amount of money to pay down your mortgage, talk with your mortgage professional or loan servicer before sending the funds.
Ask whether a recast is available and compare the potential payment reduction with other ways you could use the money.
A mortgage professional can also help you understand whether refinancing or another loan strategy may better fit your goals.
Colorado Lending Team offers a range of mortgage programs and tools designed to help Colorado homeowners and buyers evaluate their financing options. Its mortgage affordability calculator can also help borrowers estimate payments, taxes, insurance, HOA dues, and cash reserves when reviewing their overall housing budget.
Conclusion
A mortgage recast can be a useful option for homeowners who have a significant amount of cash available and want to reduce their monthly mortgage payment without replacing their existing loan.
By making a large principal payment and having the lender recalculate the payment based on the lower balance, homeowners may be able to reduce their monthly obligation while keeping their existing interest rate and remaining loan structure.
However, a recast is not automatically the best choice. You need to consider eligibility, fees, the amount of cash required, your existing interest rate, and whether using your savings for home equity is the right move for your broader financial goals.
If you are considering a large mortgage payment, inheritance, home sale proceeds, or another source of cash, ask your lender whether a mortgage recast is available and compare it with refinancing and other options. A careful comparison can help you choose the strategy that best fits your Colorado homeownership goals.
