What is a mortgage recast?

A mortgage recast, is when a lender recalculates the monthly payments on your current loan based on the outstanding balance and remaining term.

When you purchase a home, your lender calculates your mortgage payments based on the principal balance and the loan term. Every time you make a payment, your balance goes down. But what happens if you make an extra payment or pay a little more each month? Or make a lump-sum payment? When you’ve paid extra principal amounts ahead of schedule, it may make sense to request  a mortgage recast. Because a recast is based on the remaining balance of your loan and the original term, your monthly payment could decrease.

It's important to understand that mortgage recasts aren't automatic, and they aren't offered by all lenders. 

Recast vs refinance

When you refinance your home, you submit an application to create a new loan with a different interest rate and different term, or to take out equity.

With a mortgage recast, the only thing you're doing is recalculating your monthly payment. A recast doesn't affect your interest rate, remaining loan term or equity. 

When should I consider a mortgage recast?

Mortgage recasts are a great option for homeowners who want to reduce their monthly payment without changing the terms of their loan. Some of the cases where a mortgage recast may be a good idea include:

• You received a large windfall. If you receive a large cash payment, such as a bonus or inheritance, and apply a large portion of it towards your loan principal, you'll reduce the amount you owe. Your monthly payments will be based off of the new loan balance if you do a recast.
• Mortgage rates have increased. In many cases, borrowers look to lower their monthly payment but can't because mortgage rates have gone up since they closed on their loan. In this case, it doesn't make sense to refinance. Instead, if you've paid down your balance and have equity in your home, you can keep your current interest rate and recast to adjust your monthly payment amount.
• You're moving. When you sell one house to purchase another, you can use the equity from the sale towards your new home loan. But what happens if your old home doesn't close before you sign on your new one? A mortgage recast can help you reduce your new mortgage payments after the sale on your old house closes. Once you receive the funds from the sale of your home, you can make a lump-sum payment and ask your lender to recast your loan.

The advantages of a mortgage recast

Besides lower monthly payments, a mortgage recast has a few key advantages over other lending options. This includes:

• No credit check required. When you refinance a loan, your lender looks at your credit report and adjusts your terms based on your current creditworthiness. There's generally no credit check with a recast.
• Less money paid towards interest. When you reduce your principal, your overall interest decreases over the life of your loan. This, in turn, reduces how much you pay for your loan overall.
• Keep your current interest rate. With a mortgage recast, it doesn't matter what the current mortgage rates are. Even if the rates went up, you'll keep your lower rate.
• No closing costs. When you refinance your loan, you'll have to pay closing costs. Your lender may charge a fee to recast your loan, but it's usually less than traditional closing costs.
• You don't extend the remaining term of your loan. When you refinance a loan, you may have to increase your loan term. With a recast, the length of your loan doesn't change.
• No lengthy application process. Refinancing a home involves a lot of the same processes as your original mortgage application. With a mortgage recast, there's very little required so the process is much faster.

The disadvantages of a mortgage recast

For many people, a mortgage recast is a great way to reduce monthly payments. However, your payment may not be reduced as much as it would with a refinance. A recast isn't for everyone. Here are some potential disadvantages of a mortgage recast:

• You keep your current interest rate. This is an advantage if mortgage rates are up since you last financed your loan. However, if rates are down, a recast won't allow you to take advantage of a more competitive rate. In this case, refinancing might be a better option.
• You can't take out any equity. If you want to take equity out of your home, you have to refinance.
• There may be restrictions. Not all lenders offer mortgage recasts, and not all loans are eligible for a recast (for example, FHA/VA and USDA loans do not permit a recast option). Additionally, there may be restrictions regarding how much you owe, how much you've paid and your payment history.

How to determine whether a mortgage recast is right for you

One of the best ways to determine whether you should move forward with a mortgage recast is to look at what you hope to get out of your loan. Do you want to lower your monthly payments, or are you looking to access your equity as well?

There are several options for lowering your payment, but sometimes it's hard to figure out which one is right for you.