Is Recasting a Mortgage Loan a Better Option Than Refinancing?

recasting your loan may make more sense than refinancingWhile many homeowners are familiar with the option of refinancing their mortgage, not all homeowners understand loan recasting. This may be because not all lenders offer recasting or re-amortizing, and not all borrowers are eligible. However, the process could save you money in two ways: by reducing your monthly mortgage payment, and by allowing you to avoid the cost to refinance.

Essentially, a loan recast means that while your interest rate and your loan term remain unchanged, your monthly mortgage payment is reduced to reflect your actual current loan balance. For example, if you’re 6 years into a 30-year mortgage, once you recast your loan, you will still have 24 years remaining to pay it off. For recasting to work, lenders require an additional lump sum payment to reduce your balance. The size of that additional payment impacts how much you can save with a loan recast. However, instead of recasting, you could pay a lump sum toward your existing loan, which would decrease your balance, but not reduce your monthly mortgage payment.

How Loan Recasting Works

Loan recasting can make sense if you inherit money (or receive a significant bonus at work) and wish to apply it to the balance on your mortgage. Because you reduce the balance ahead of schedule, you ultimately will pay less interest. This then enables lenders to recast your loan, or recalculate your monthly mortgage payment.

Individual lenders have different requirements for loan recasting. For example, some lenders require a lump sum payment of $5,000 or 10% of the loan – whichever is greater – to reduce the balance before qualifying someone for a loan recasting.

If you have a $400,000 mortgage at 4% interest for 30 years, your monthly principal and interest payments would be $1,910. If you pay the loan for 10 years, your remaining loan balance would be $315,136. A lump sum payment of 10% of the remaining loan balance would be $31,554, bringing the balance to $283,582. In this case, the monthly payments would reduce to $1,718. However, keep in mind that while saving $200 per month on your mortgage payment is a worthwhile goal, you will also have spent a significant amount of cash to achieve that reduction in payment.

Of course, lenders do charge a small fee for loan recasting, which is often as low as $250.

Determining Eligibility

Loan recasts are allowed on conventional, conforming Fannie Mae and Freddie Mac loans, but not on FHA mortgage loans or VA loans. Some lenders recast jumbo loans, but consider them on a case-by-case basis.

In order to qualify for a loan recast, you must be current on your loan payments, and have the cash necessary to pay down your principal balance. A credit check and an appraisal are not necessary.

signing a contract

Advantages of Loan Recasting

  1. Reduced Payment. By recasting your loan, you can ease your cash flow without the expense of a home refinance, which can require an expenditure of as much as 6% of your loan balance. In fact, in some cases, what would be spent on the refinance could be used to reduce your balance enough to qualify for a loan recast.
  2. No Appraisal Required. Unlike a home refinance, a loan recast does not require an appraisal. If your home has dropped in value, you may not be eligible for a refinance, since most lenders only refinance a home with at least 5% to 10% in equity.
  3. No Credit Check Needed. Loan recasts generally do not require credit approval. If you have credit issues and cannot qualify for a refinance, you may still qualify for a loan recast.

In one specific case, loan recasting can be particularly beneficial. If you are a homeowner who has purchased a new home before selling your current home, you may temporarily need to pay two mortgages. Once you have sold your previous home, you can use the profit from that home sale to pay down your loan balance and recast your mortgage to make the payments more affordable. Many homeowners deliberately plan to use loan recasting for this purpose when moving from one home to another. Just remember that you typically need to wait 90 days after your loan goes to settlement before you can recast it.

Disadvantages of Loan Recasting

Before you decide to recast your loan, you would be wise to evaluate it in the context of your entire financial plan. Some of the disadvantages of loan recasting include:

  1. Ties Up Cash. If you have a lump sum of cash, make sure that paying down your mortgage is the best use of that money. For instance, if you have high-interest credit card debt, you should absolutely pay that off first. If you lack an emergency savings fund or need to set aside money for other expenses, it’s probably best that you not put your entire windfall toward paying down your mortgage.
  2. Doesn’t Reduce Mortgage Term. You should also consider loan recasting in the context of your retirement. Many older homeowners hope to pay off their mortgage before they retire. However, a loan recast will not shorten your loan term, although it could improve your cash flow. If your goal is to reduce your mortgage balance, switching to biweekly mortgage payments or simply making regular extra payments to your principal may be a better option than a loan recast.
  3. Doesn’t Reduce Interest Rate. If you are paying a high interest rate, a refinance may be a better option. A lender can compare the costs and monthly payments on a refinance and a loan recast to determine which is the best fit for you.

Final Word

Loan recasting isn’t for everyone, but if you have extra cash, consult your lender to see if this method of reducing your monthly payment is right for you. If you are a homeowner who is selling one home and moving into another, you could very well benefit from a loan recast. Those who own a home with reduced value or have credit challenges may also benefit more from a loan recast than refinancing.

Can you think of other scenarios in which a loan recast would be a wise financial move?

  • Dana

    Check out bankrate on this topic or did you already? It’s kinda word for word, except bankrate has more details.

  • Jerry Wyatt

    Thank you for your cogent article.

  • Ingvar Leskovar

    Actually loan recasting is a great way to pay off your mortgage in expedite manner – without refinancing. It’s not American way of doing it, but works GREAT.
    Here’s how. You make a FIRM decision to pay off your house. Then, you start making additional monthly payments to your principal, building up equity fast and furious.
    At some point, you collect substantial equity. Thing is, your monthly payments were originally set based on the original loan amount. But NOW, what you OWE changed right? As you have equity.
    So you recast. $250. Boom, done. Your monthly payment drops down significantly. But, instead of wasting additional funds now available, you keep paying monthly exactly the same amount you paid before. Say, you paid $5000 a month and your payment was $3000. NOW, your payment is $2000, but you top it with $3000 to principal.
    As the result, your equity grows even faster. What you do?
    You collect more equity and recast again and keep paying same established $5000 (monthly plus extra into principal). I recasted twice in 1 year, as our equity was building up in geometrical progression.
    We slaughtered, in this manner, $380 000 mortgage in 7 years. Actually, in about 4, as it took me several years to find out about recasting.
    Thereafter, I shall NOT take on mortgage that does NOT allow recasting.

    • Kanlan

      If you pay $5000 a month anyway, recasting is just a mental game that costs you money.

    • Jeremy

      I agree with you… Recasting is a useful tool in paying down your home quickly EVEN IF you make only one additional mortgage payment per year.

      NOTE: This is a good technique to do earlier in the loan life cycle (within the first 8 years or so). After that, you may end up paying more interest due to the nature of amortization.

      As you pointed out, the monthly payments are calculated on the basis of the original loan amount, with some money being applied to the principal and some applied to the interest. Even though you make one additional mortgage payment/year, you still pay the interest as determined when the loan was taken. There is no benefit to one extra mortgage payment/year compared to a lump sum payment equivalent to 5 mortgage payments every 5 years (other than budgeting).

      Enter loan recasting. Instead of paying a little bit extra every month, save that money and pay a lump sum amount when you have enough to meet the recasting requirements. This will it reduce the amount of principal (exact same outcome as paying this additional amount monthly) while also reducing your monthly payments.

      You can continue making the original monthly payment and you will be paying down more of the principal *without increasing monthly payment*.

      Loan amount = $220,000 @ 4% interest rate for 30 years.

      Monthly payment = $1,000.
      One additional mortgage payment/year = $83.33/month

      In 5 years, you will save $5000.
      Recast your loan.
      New monthly payment = $911.65

      Continue paying $1,000. You will be paying down an additional $89/month without changing the monthly payment.

      In effect, you are now making TWO extra mortgage payments per year!