Mortgage recasting means handing over a lump sum of money to your lender. They use that money to shrink your loan amount, then recalculate your repayment schedule based on that new, smaller balance. Not all mortgages allow for recasts, but if yours does, it can help you lower your monthly mortgage payment. 

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When to consider mortgage recasting

When you have a mortgage, there are a few things that determine how much you pay every month:

• Your loan balance
• Your interest rate
• Your loan term (how long you have to repay, e.g., 30 years)

Lenders factor all of this in when they calculate your amortization schedule. This is the repayment plan that makes sure you’ll pay off your full loan balance, plus all of the interest that will accrue, by the end of your loan term. 

If you come into some money, you might want to apply it toward what’s probably your largest single source of debt: your mortgage. You can explore refinancing, but that comes with a rigorous application process and closing costs.

Because mortgage recasting changes your loan balance, it gives you a way to adjust your monthly mortgage payments without having to get a whole new loan (i.e., refinance). If your lender allows it, it can be a useful tool. 

Borrowers most commonly explore mortgage recasting when they come into a large lump sum of money. You might look into this if you got a bonus at work or received an inheritance, for example. It’s also fairly common to do this if you bought this new house before you sold your old one. Once you sell your previous property, you can use the proceeds for a recast. 

How mortgage recasting works

If your lender allows mortgage recasting, the recast essentially means setting up an exchange. You hand over the lump sum of money and, usually in a few weeks’ time, your lender hands you a new amortization schedule.

Let’s say you have $250,000 and 20 years left on your mortgage. You give your lender $20,000 to apply toward mortgage recasting. Your lender crunches the numbers and calculates a new repayment schedule for you, one that has your new, lower balance of $230,000 paid off in 20 years. 

You’ll still pay the same interest rate. But because the loan balance is smaller, interest builds up more slowly. 

That means a recast helps you save money in two ways:

• On a recurring basis, by reducing your monthly mortgage payments
• Over time, by reducing the total amount of interest you’ll pay over the life of your loan (thanks to the smaller loan balance you get after mortgage recasting)

Plus, there’s a third way a loan recast can be financially beneficial. If you’re currently paying for private mortgage insurance (PMI), a recast could help you get rid of it. You’re allowed to request PMI removal once your loan-to-value (LTV) ratio hits 80%. If you’ll cross that threshold with your recast, you can ditch this added monthly cost as part of the process. 

Make sure you discuss this with your lender. They’re legally required to take PMI off once your LTV ratio hits 78%, but you can request removal at the 80% mark. 

Mortgage recasting vs. refinancing

A lot of borrowers who want a lower monthly payment look to refinancing. If you can get into a lower interest rate, a refi can absolutely be a useful savings tool.

You should know, though, that refinancing is a lot more involved than recasting. With a refi, you fully replace your current mortgage with a new one. That means you go through a whole new application and underwriting process. You’ll also need to pay a new set of closing costs. 

Refinancing, then, is your best option when you want to make notable changes to your loan. If you want to get a new interest rate or move from a loan with an adjustable rate to a fixed one, a refi might make sense. If you’re just trying to lower your monthly payments, though, look at recasting first. It’s a cheaper and easier path forward. 

Mortgage recasting vs. making a lump-sum payment

Alternatively, you could take the route with the least amount of work: apply the lump sum to your mortgage without requesting a recast. This will keep your monthly payments the same, but it should accelerate your payoff timeline. That means you’ll fully pay off the loan sooner.

If you’re comfortable with your current monthly mortgage payment, this is an aggressive option that helps you save more in interest than recasting. 

Before you choose this path, check your loan for any prepayment penalties. You don’t want to make a plan to cross the finish line early only to find you’ll be hit with a fee for it. 

Different mortgages, different recast rules

Not all mortgages allow for recasting. For starters, government-backed mortgages — FHA, VA, and USDA loans — usually can’t be recast. 

Beyond that, even some conventional mortgages aren’t eligible for recasting. You can reach out to your lender to see if it’s an option for your loan. 

If it is, you might need to:

• Meet a minimum lump sum amount to initiate the recast (e.g., $5,000)
• Pay a mortgage recasting fee (usually a few hundred dollars) 
• Have a minimum amount of equity in the house

If you’re considering a recast, compare it against a refinance to figure out which will be best for you. 

To get a feel for current interest rates, use our rate tables. If rates are currently well below what you’re paying, it might be worth the effort and closing costs to refi. But if your rate is comparable — or even below — the current rate environment, a recast might be your best option. And remember, if you’re comfortable with your current monthly mortgage payment, you can always apply the lump sum without recasting and move toward payoff faster.