Mortgage Recast: What It Is, How It Works

What Is a Mortgage Recast?

A mortgage recast, also called a loan recast, is a feature of some types of mortgages where the remaining monthly payments are recalculated based on a new amortization schedule. During a mortgage recast, the borrower pays a large sum toward their principal, and their mortgage is then recalculated based on the new, lower balance outstanding.

Some mortgages have a scheduled recast date, which is the date when the lender will calculate a new amortization schedule based on the mortgage's remaining principal balance and term.

How a Mortgage Recast Works

For the borrower, the primary benefit of recasting a mortgage is to reduce monthly payments. Often, a mortgage lender will reduce the term of a loan if extra principal payments are made but maintain the same fixed monthly amount due—simply by increasing the principal amount and reducing the interest portion of the payment.

Recasting can lower the amount of interest the borrower will pay over the life of the loan if a sufficiently large principal payment is made, reducing both the interest and principal remaining on the loan's new monthly payments.

Mortgage Recast vs. Refinancing

A mortgage recast can be a more comfortable option than refinancing. With a refinance, you replace your current mortgage with a new mortgage loan, which can be costly and depends on your credit standing. A mortgage recast does not involve a credit check and continues with the original mortgage.

On the other hand, refinancing a mortgage means paying off the existing loan and replacing it with a new one. Reasons why homeowners refinance include:

1. The opportunity to obtain a lower interest rate.
2. To shorten the term of their mortgage.
3. The desire to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice versa.
4. An opportunity to tap into a home's equity to finance a large purchase.
5. To consolidate debt.

Types of Mortgages That May Be Recast

Negative Amortization Loans

Mortgage recasting can be written into the loan terms and is associated with a negative amortization loan. A negatively amortizing loan has a payment structure that allows for a scheduled payment that is less than the loan's interest charge.

When a payment is less than the interest charge at the time, it creates deferred interest. The amount of deferred interest created is added to the loan's principal balance, leading to a situation where the principal owed increases over time instead of decreasing. Due to this increasing principal, negative amortization mortgages require that the loan is recast at some point so that it will be paid off by the end of its scheduled term. 

Negative amortization mortgages also sometimes have triggers that might cause an unscheduled recast to occur. This may kick in, for example, if the loan's principal balance reaches a set limit through negative amortization.

Option Adjustable-Rate Mortgages (Option ARM)

Negative amortization mortgages are also known as payment option adjustable-rate mortgages (Option ARM). These mortgages give borrowers options that include paying all of the principal and interest or paying only some of the interest.

While the choices available with an option ARM allow for more flexibility on payments, the borrower could easily end up with more long-term debt than before. As with other adjustable-rate mortgages (ARMs), there is the possibility of interest rates changing drastically and rapidly based on the market.

Example of a Mortgage Recast

Even if a mortgage does not include a recast option, you can approach your lender to see if a mortgage recast will benefit you and lower your monthly payments. By paying a lump sum and recasting your mortgage, you can reduce your housing costs. By contrast, if you submit a lump sum without recasting, you lower your balance, but your monthly payments will remain the same.

Let's say you have a $500,000, 30-year fixed-rate mortgage with a 4% interest rate. Your combined interest and principal payment would be around $2,400 per month in terms of principal and interest.

After ten years, you receive a windfall lump sum of $375,000. If you decided to use that lump sum to pay down the mortgage without recasting it, you would continue to pay around $2,400 a month, but the length of the loan would become shorter as you are effectively paying down additional principal.

If, on the other hand, you recast the loan over the remaining 25 years of the mortgage, the monthly payment would go down to around $900 per month in terms of principal and interest.

The Bottom Line

If you've come into a large sum of money and want to pay a large portion of your mortgage principal, you might consider recasting the mortgage. While the length of the loan won't decrease, you'll have significantly lower monthly mortgage payments. Keep in mind that recasting won't change your interest rate, however. So, if rates have fallen since you took out your mortgage, you might want to weigh the benefits of refinancing instead.