After publishing, The Hardest Mortgage Refinance Ever, a reader asked me whether I've ever considered recasting a mortgage instead.
My quick answer was no, despite having refinanced multiple mortgages on multiple properties since 2005. I'm all about getting the lowest mortgage rate possible.
Recasting a mortgage can be a good idea if you come into a lump sum of cash and want to reduce your monthly mortgage payment while not having to go through the hassle of refinancing.
In this post, I'd like to explain what a mortgage recast is, its pros, its cons, and why you may want to recast a mortgage instead of refinance.
Just because I've only refinanced my mortgages doesn't mean that we should ignore the benefits of recasting a mortgage instead. For those of you who’ve recast, feel free to pitch in as well.
What Is A Mortgage Loan Recast?
A mortgage recast is a feature in some types of mortgages where the remaining payments are recalculated based on a new amortization schedule. During a mortgage recasting, an individual pays an additional lump sum toward their principal, and their mortgage is then recalculated based on the new balance.
For example, let's say you’re 5 years into a 30-year amortizing mortgage at 4%. Your loan size is $500,000 and the value of your property is $700,000 for a 71.4% LTV. Your monthly payment is $2,387.
You're happy with your lender, happy with your 4% mortgage rate, have a loan that allows you to recast, and you don't want to go through the hassle of refinancing a loan and paying excessive fees. Further, you just inherited $200,000 from your late aunt.
If you use the $200,000 to pay down principal from $500,000 to $300,000, your monthly mortgage payment will stay the same at $2,387. The only thing that will change is the percentage of payment going towards principal (more) and interest (less). If your goal is to increase monthly cash flow, paying down principal, without refinancing or recasting, won't help you.
But if your lender allows you to recast your mortgage, you can use the $200,000 to pay down principal, and have the remaining $300,000 amortize on a new 25-year amortizing schedule. If so, your new monthly payment would decline by $803 to $1,584.
Determining Eligibility To Recast Your Mortgage
To recast your loan, your lender usually requires you to pay down a lump sum towards principal. Paying down 5% or more is common. There is also usually a small fee to recast (<$300 or free). Further, not all mortgages have the option to recast.
Loan recasts are allowed on conventional, conforming Fannie Mae and Freddie Mac loans, but not on FHA mortgage loans or VA loans. FHA and VA loans already give borrowers a lot of benefits such as a lower downpayment and subsidized lower interest rates.
Some lenders recast jumbo loans, negative amortization loans, and option ARMS, but consider them on a case-by-case basis. You're just going to have to ask your lender whether your loan is eligible. Further, before refinancing your loan, you should ask as well.
Finally, 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.
Advantages of Mortgage Recasting
Here are the main advantages of mortgage recasting versus mortgage refinancing. They are:
- Reduced Payment. By paying down a lump sum, you will reduce your monthly payments.
- No Appraisal Required. Unlike a home refinance, a loan recast does not require an appraisal. The average cost of a home appraisal is between $600 – $800, depending on size of your house and where you live. My last appraisal cost $620 with WF, but $800 with Citi for the same house!
- No Credit Check Needed. Loan recasts generally do not require credit approval. This is great if you have suboptimal credit or can't get the best refinance rate due to your suboptimal credit. The average credit score for a qualified mortgage is now roughly 760.
- Prevents You From Slacking Off. Given you need to come up with a lump sum to recast your mortgage, you are taking the right step to pay down your loan and pay less interest. It is very easy to refinance your mortgage multiple times and delay paying it off because the amortization schedule always resets to zero.
- Improves A Transition Finance Problem. In some cases, you might buy a new home before selling your current home. I never recommend doing this given so many things can fall through when trying to sell. But if you do, you may temporarily need to pay two mortgages. If you have any proceeds from your home sale, you can use those proceeds to recast your mortgage to lower your payments. Given you just got a new mortgage for your new home, it rarely makes sense to refinance given the rates probably haven't changed much and the fees incurred would make refinancing so soon not worth it.
Disadvantages of Mortgage Recasting
Now that we've discussed the benefits of mortgage recasting, let's look at the negatives.
- Requires A Lot Of Cash. In order to recast a mortgage, you need to come up with a large lump sum. Depending on your liquidity situation, injecting more cash into a primary residence may not be the wisest move. Not only will you reduce your liquidity, you will also forgo any potential returns your cash might generate. If you have other debt at higher interest rates, it may be better to implement FS-DAIR and pay down other debt first.
- Doesn’t Reduce Mortgage Term. A loan recast will not shorten your loan term, it will just keep you on track with a lower payment. If you want to shorten your mortgage term, you will need to keep paying extra principal after the mortgage recast is complete.
- Your Interest Rate Stays The Same. A recast lowers your monthly payments, but it doesn't lower your interest rate. My latest refinance was for 2.625%. If I was able to recast my mortgage, I would be paying 4.5%, despite only having 25 years left.
Who Is The Ideal Candidate For Recasting A Mortgage?
Here are some conditions I think that if met, would make you an ideal candidate for recasting a mortgage.
- Needs to reduce monthly expenses.
- Does not have any better investment ideas for his or her cash.
- Does not want to go through the pain of refinancing a mortgage.
- Does not have a high enough credit score to refinance to a better rate.
- Does not want to pay expensive refinance fees.
- Does not qualify for a “no-cost refinance.”
- Has a mortgage on the smaller side (<$300,000), which makes refinancing cost-ineffective due to the fees.
- Is a more conservative investor who prefers to simplify life.
- Really likes his or her existing mortgage rate or can't qualify for a better one.
If I could rewind time, I still wouldn't recast any of my mortgages because I'm all about trying to lower my mortgage rate to save money.
It would make no sense for me to recast my previous mortgage at 4.5% given I could refinance at 2.625%. To ensure that I don't spend 30 years paying off the mortgage, I plan on paying down about $80,000 in principal each year so that I have a zero balance by October 1, 2026.
Refinancing Should Save More Money
In my opinion, refinancing to a lower rate if the fees allow you to breakeven within 24 months is better than recasting. I've always either refinanced when my breakeven was under 12 months or my refinance was a no-cost refinance.
I also think recasting a mortgage is better than doing nothing because you're paying down debt and reducing your monthly expenses.
Finally, getting a fixed-rate mortgage amortized over 30 years is better than renting for 30 years. In 30 years, your $2,000 a month rent payment will increase to $4,854 assuming a 3% annual growth rate.
Meanwhile, your $2,000 mortgage payment will stay fixed and eventually go to $0. As an added bonus, you will then have an asset to rent out or sell if you wish.
Recasting a mortgage isn't for everyone, but it could be for you. Always do the math before making a decision. Look at all your options and feel blessed that you have some.
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The Benefits Of Recasting Over Refinancing A Mortgage is a Financial Samurai original post.
Thank you for this article as recasting as Bebe on my mind. I have a primary home at a 3.1% mortgage rate and the remaining balance is pretty high. I’m planning to buy a second home and rent out my first but given the high mortgage and lower rents in my area, I’d have to cover the difference with a renter.
Currently, mortgage rates are much higher than 3.1%, and I’m struggling with deciding if I should do a recast on the first home or use that money to put down a larger down payment on the second home. Leaning towards this second option and for the first mortgage, considering paying extra principal to reduce the length of the mortgage instead!
I’m subject to the Required Minimum Distribution that requires me to take a larger withdrawal from my IRA’s than I need. I decided to satisfy my RMD using the proceeds to recast my mortgage. I lowered my mortgage payment about $500 per month. If I did not have to take a RMD, I would not have done a recast letting the money remain in my IRA producing a return.
I am conservatively invested in my 401k since I am retired and I don’t wish to take any wild rides with my investments. At my age, I don’t have 20 to 40 years to let my investments ride (like I had done since I was 30). I ran a spreadsheet from my current age (65) to age 93 and the results showed that it would be to my financial advantage to lower my house payments and/or pay off my mortgage. So I recast my mortgage last year, which significantly lowered the interest (and my payment) on my loan, while still keeping the existing years left on the loan. I used proceeds from a sale of some stock for the recast payment. (That stock has since decreased in price so I was lucky in that regard.) The sale of the stock (15% tax rate) didn’t raise my effective income tax rate significantly. I plan on paying off the remaining loan balance in the next two years. Because of my circumstances, the recast appeared to be the best course of action for me.
Just went through a recast with a credit union, Penfed. As I’d been paying extra on the mortgage since origination 10 years ago they honored my request for a recast, paid a $250 fee and it became within 45 days of my initial request. I did it to lower the monthly payment by over 50% as a risk management measure to ease the monthly payment on my family due to an upcoming medical procedure. If all goes well, I’ll continue to pay it down ahead of time.
My point being that a large lump sum payment is not always necessary for a recast that some places do consider an aggressive repayment history instead.
Hi Fred, congrats.
How much principal did you pay down in those 10 years, how big was the original principal, and was there basically 20 years left of amortization left?
thx
Just saw this comment, sorry for the delay. The original balance was $190K and paid it down to $80K and there are 20.5 years left of amortization.
I’ve always looked at it as a great tool for people to leverage as a quick win that don’t want to go through the pains of re-financing. As you’ve recently written, re-financing isn’t a quick and easy process for most (we are currently re-fing too and started the process back in August!).
If you come into a lump sum of money that you wanted to use towards your mortgage, I would consider a recast instead of a refinance or straight principal payment for:
-Easy, low effort to recast, lowers money payment which gives you increased cash flow flexibility. This is huge for piece of mind.
-Take the increased cash flow diversity and start applying it to principal while you can. It will shorten the duration of mortgage over time.
The second point is key here. Win-win in my book. Too many people take the cash flow change and squander it!
In a world of low rates, once you get a sub ~4% rate, re-casting becomes a much more attractive option for the above reasons I think.
Good post!
this analysis is based on the assumption that you have not made extra principal payments in the first five years of the mortgage.
Let’s say that you (1) plan on staying in the house until it is paid off and beyond, and (2) have shortened the mortgage by a couple of years due to the extra principal payments early on.
Recasting takes the mortgage back out to the original 360 month payment schedule.
So it can be counterproductive, with minimal ROI if you have made extra principal payments.
This is only true if, after recasting, the homeowner begins making minimum payments.
A person who pays additional principle in order to shorten the life of the loan has no reason to recast. Unless they plan to continue making overpayments but want the option of paying less on a month-by-month basis.
I personally would jump at the chance to lower my minimum monthly payment, even if I didn’t plan to pay less. More flexibility if something happens.
I own a lot of smaller/cheaper rental houses with their own individual mortgages. I find refinancing to never work out because the fees overpower the actual interest savings pretty easily.
Your houses all seem pretty expensive so the interest is dominant but when I want to do something about my mortgages I recast to keep fees low… or just pay it off :P
I moved recently and recast a mortgage for the first time. At the time of our move, the teaser rates on a Jumbo 5/1 ARM were the lowest I could find with a 30-year amortization. That seemed counterintuitive, but I figured I may as well use it to my benefit.
After closing on both the purchase and sale I had approximately $240,000 in cash proceeds which I immediately used to pay down and recast the loan. It allowed me to get the lowest rate available to me, and keep my monthly payment as comfortable as possible
Sam, you mentioned “Doesn’t Reduce Mortgage Term” as a Disadvantages of Mortgage Recasting. The lumpsum principal pay down would reduce mortgage term; but the reduction is at the tail end of the amortization schedule which contains more principal and very little interest.
However recasting helps save money now. If we consider time value of money isn’t it better to pay less now v/s pay less in the future. Is that a reason banks encourage principal paydown v/s recasting?
Paying a lump sum down does not reduce the mortgage term with a recast. You pay less interest because the loan is recast based on the remaining time period left to payoff, not 30 years. If you feel you are correct, please use an example and highlight your experience. Thanks
Yes, paying a lump sum down does not reduce the mortgage term with a recast. I am contrasting making additional principal payments v/s recasting.
We actually just paid off our mortgage … but now I am thinking of moving back to Canada – maybe small town Ontario(cheaper) or for no winters … the Vancouver BC area (big city life and 289 days of sunny weather ) …. nicer winter weather… we will rent to start … but we maybe buy a 600K condo/townhouse? in Vancouver and retire or semi-retire with couple of million to invest in index etc funds once we sell some overseas real estate etc … our daughter then can go to school in Canada and finish up there etc … free health care … what do you think of the plan ? advantages? disadvantages?
I kinda feel bad. I used to be a banker for over a decade and I’ve never heard the term before. Of course, I never really worked directly with mortgages (we had our-of-branch mortgage specialists), but I’ve done home lending before for home equity loans–primarily HELOCs–and have never heard of a recasting. Then again, I’m not sure how a recasting would’ve even work on a HELOC (I guess during the repayment period).
For me, though, a recasting is just out of the picture for much the same reason a refinance is out of the picture: it’s just not worth it for me. I’m less than two years into my 30 year fixed 4.125% with roughly $77,000 left on a $90,000 mortgage (the exact amount is on my blog’s Debt page; I can’t remember the balance offhand). Paying $300/month additional principal is probably the best thing I can do when it comes to paying off that mortgage quickly and effectively.
Very interesting article, Sam. If you ever see me talk about recasting in the future over on my site, I freely and fully admit I got the idea from you. Though I must ask, did you know about this concept beforehand? I know a reader’s comment prompted this article.
Sincerely,
ARB–Angry Retail Banker
Great article. Could a loan recast also avoid property tax re-assessment?
Sam – how did you manage to only invest in Heartland eREITs with Fundrise? I just joined the platform and put in $20k to start and was told I can only invest into the diversified funds they offer, not into individual eREITs.
They gave me the option of income funds, balanced funds, and growth funds. Each with a basket of funds structured towards specific outcome.
Hi Steven – I invested in one commercial real estate project for $10K and then invested $800K in the RS domestic equity fund that invested in 17 properties across the country. RS is no longer accepting new investors as they’re winding down their platform over the next two years.
To invest with more money, you’re going to have to invest in individual projects that fit your criteria and make sure you are well diversified.
Related: Equity Or Debt Real Estate Crowdfunding
Another spot where this could make a lot of sense is for people who have done house hacking. We purchased our first property as a owner occupied duplex. We then bought and moved to a different duplex. We plan to eventually move out to a single family home. However we will keep and have owner occupied financing on those two duplexes. We will probably never be able to refinance them into a lower rate with non owner occupied financing. Therefore recasting may be our only way to lower the mortgage payments. I am assuming we don’t need to meet the same requirements to recast as refinance. Thanks!
I never heard of recasting until a lender told me about it this year, since I was asking how to improve my cashflow. my loan is 160K after the recast. My bank Chase doesn’t charge for a recast and the minimum is 5K so it’s not a huge amount of money to put down. But of course I’ve had the asset for a few years and paid down some principal so I was able to reduce my monthly payment by $300 by recasting. It was a painless process with just signing a form and was done withing a month or so. I am still happy with my interest rate of 3.75 so there was no point to re-finance and start the clock again at 30 years. I think I made the right decision.
Right on! Seems like a no-brainer for you. How long did the entire process take?
I just looked to double check. I paid down on 15K April 1st, and May 5th payment was already at the lower monthly payment.
Banks don’t advertise recasting of course since it’s not in their benefit. But when you mention it they give you the proper information on their process right away.
It is in their benefit. By re-amortizing you are adding how much you’d pay in interest in the long run, assuming you’ll now pay the minimum payment.
That said, a recast can still be a great idea. I throw an extra 20k at my mortgage each year and recast. But instead of paying the new monthly amount I continue to pay the original monthly P&I cost. Due to a yearly recast the house will be paid off exponentially faster. And at this point if I ever lose my job or have cash flow problems I can reduce my house payment by $800 (at this point) without needing to refinance or see any penalties.
Great article and something I didn’t even know about! Not sure I would use it, but there are several friend who might. Many of my friends have recently received inheritances, and the recast might be a good idea for them. I am like you and would rather get the house payment done earlier to have one less financial burden, but other are struggling to pay for that large house payment with mediocre credit, and can’t refinance at these great rates.
Sam thanks for getting this info out. Like I said to you in my Original comment most people and banks have no idea what recasting is all about with the merit being that IF you have the money or IF you have paid a lot of principle over the length of your mortgage term you are actually not giving the bank an interest free loan. The other addl benefit is that if you want to use leverage you can increase your heloc on your property due to having more equity.
Plus the way I have used recasting is to take the extra cash flow and pay down more principle every yr. and do that every yr until the payment is gone. This has helped me pay off a ton of mortgage debt in just 10 yrs. The pros and cons of paying down principle are a whole other debate that I can see the pros and co s of both sides.
Great Article Sam!
One thing I found out is recasting could also be called “Loan Modification”.
Another item not mentioned in the article but perhaps you can discuss is the tax impact of these transaction and whether they should play a role in the decision.
Hmm, I’m not sure it’s the same.
I received a loan mod right after the crisis for my vacay property out of the blue.
Check it out: https://www.financialsamurai.com/how-to-get-a-mortgage-rate-loan-modification/
On my recast I did sign a loan modification agreement since the payment amount changed. The agreement was set up to address a variety of conditions and I filled in and initialed the relevant ones to my recast. The key thing was that the original maturity date remains the same.
I am jealous of how skilled you are to turn around and write this so quickly and clearly after the comment on your last post. To organize your thoughts and communicate them succinctly with little turnaround time is a testament to your hones communication skills.
Our original plan when buying our house was to recast using an inheritance. It turns out the inheritance is in a tax advantaged account that requires my wife to take RMD each year. She is only 30 so the RMDs are minuscule.
Once we understood the tax structure of the account she inherited, it was no longer an option to use the money to to recast.
We have a 60/40 stock/bond split and intend to allow it to grow tax free and reinvest the RMDs as we are required to take them.
All this to say, we have a much larger mortgage than expected at 3.975% 30 year fixed. (I don’t understand how you got such a low rate or why anyone would ever pay points to lower their rate.)
Doesn’t seem to make sense to refi at current rates.
We don’t pay extra on the principal. Everything goes into our after tax account with low cost index funds.
Thanks for writing this. Good to confirm the pros and cons of recasting.
Fascinating! This is the first I’ve heard of recasting. With the amount of stress and time involved these days going through a refi I can totally see how doing a recast would be a good option on a smaller mortgage if you want to pay down a large chunk and benefit from lower payments. I’ve paid down chunks of principal before, but never as high as 10%. I’ll definitely keep this in mind in the future as an alternative if I’m considering a refi or reducing monthly costs. thanks!
With $200k you are much better off investing in an income producing asset and getting a multiple of 4% return on your money. While it’s a new option that I was unaware of with recalculating an amortization schedule, I personally would not use it.
Thanks Sam
Definitely some food for thought. I love crunching numbers on hypothetical situations like this.
Recasting is definitely an option. If I inherited $200k I’d leverage that into a down payment on 5-10 Single family rental properties that would cash flow $2k-$4k a month.
Recasting in my opinion is the opposite of leverage, and you’ll be losing the benefits of inflation with a mortgage. Fixed interest debt is the only friend to inflation.