What Is a Mortgage Recast?
Let me explain what a mortgage recast is—it's a feature in some mortgages where you, the borrower, can have your remaining monthly payments recalculated based on a new amortization schedule after paying a large sum toward the principal. This recalculates the loan using the lower outstanding balance, keeping the original term intact.
Some loans come with a scheduled recast date, where the lender automatically adjusts the amortization based on the remaining principal and term.
Key Takeaways
When you make a large principal payment, the lender recalculates your loan to create a new amortization schedule, which details how each payment breaks down into principal and interest until payoff. The big advantage here is that it can lower your monthly payments significantly. You'll see this often in negative amortization loans or option adjustable-rate mortgages, where recast clauses are built into the contract.
How a Mortgage Recast Works
As a borrower, your main gain from recasting is cutting down those monthly payments. Lenders might shorten the effective term with extra payments but keep the monthly amount the same by shifting more to principal and less to interest. If you pay enough principal, recasting reduces the total interest you'll pay over the loan's life, as both interest and principal in future payments drop.
Mortgage Recast vs. Refinancing
You might find recasting more straightforward than refinancing, since it doesn't involve replacing your current mortgage with a new one—that can get expensive and hinges on your credit. Recasting skips the credit check and sticks with your original loan terms.
Refinancing, however, means paying off the old loan and starting fresh, often to grab a lower rate, shorten the term, switch between ARM and fixed-rate, access equity, or consolidate debt. Remember, recasting won't lower your interest rate, unlike refinancing.
Types of Mortgages That May Be Recast
Recasting is often part of negative amortization loans, where payments can be less than the interest due, creating deferred interest that adds to the principal and causes it to grow. These loans require recasts to ensure payoff by the end of the term, and triggers like hitting a principal limit can force an unscheduled recast.
Option adjustable-rate mortgages, or option ARMs, fall into this category too—they let you choose payment options, like paying full principal and interest or just part of the interest, but this flexibility can lead to higher debt. Like other ARMs, rates can fluctuate sharply with the market.
Example of a Mortgage Recast
Even without a built-in recast option, approach your lender to see if it makes sense for you—it can lower your payments after a lump-sum payment. Without recasting, that lump sum just reduces the balance but keeps payments the same.
Take a $500,000, 30-year fixed-rate mortgage at 4% interest—your monthly principal and interest would be about $2,400. After 10 years, if you pay $50,000 toward principal without recasting, payments stay at $2,400, but the loan shortens by around four years. With recasting over the remaining 20 years, payments drop to about $2,080.
Disadvantages and Eligibility
There are downsides: not all loans qualify, you might face fees, and it won't shorten your loan term. Only conventional loans are eligible—FHA, USDA, and VA loans aren't.
The Bottom Line
If you've got a large sum to apply to your mortgage principal, consider recasting to lower your monthly payments without shortening the term. It won't change your interest rate, so if rates have dropped, refinancing might be the better route—evaluate both options carefully.
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