What is a mortgage recast? A lump sum to principal after which the servicer re-amortizes the loan, lowering the monthly payment at the same rate and the same payoff date, with no refinance.
A mortgage recast is a lump-sum payment to principal followed by the servicer re-amortizing what is left: the remaining balance is spread over the remaining term at the same interest rate, and the monthly payment drops to match. Nothing else moves. The rate is the note rate, the maturity date is the same date, and there is no application, no appraisal and no credit pull, because it is not a new loan. Re-amortization is the other name for the same thing.
The arithmetic is short. Take a $350,000 loan at 6.5 percent over 30 years, about $2,212 a month in principal and interest. After two years the balance is roughly $341,900. Pay $50,000 to principal and ask for a recast, and $291,900 amortized over the remaining 336 months at 6.5 percent comes to about $1,889 a month, a reduction of about $323. The servicer charges a fee, usually a few hundred dollars, and sets a minimum lump sum, commonly $5,000 or $10,000. Both are the servicer's own terms rather than a federal rule, so they are worth asking about before the money is sent.
Not every loan can be recast. Conventional loans generally can, at the servicer's discretion and under whatever its policy says; FHA and VA loans generally cannot, so it is a question for the servicer rather than an assumption. The difference from simply paying extra principal is worth being exact about. Extra principal keeps the payment and shortens the loan, which retires the balance faster and saves more interest overall. A recast keeps the payoff date and cuts the payment, which saves less interest for the same dollars. What differs is which obligation gets smaller: the number of payments, or the size of them.
A worked example
A $350,000 loan at 6.5 percent over 30 years pays about $2,212 a month in principal and interest. Two years in, the balance is roughly $341,900. A $50,000 lump sum to principal followed by a recast re-amortizes $291,900 over the remaining 336 months at the same 6.5 percent: about $1,889 a month, $323 less, with the same payoff date and a servicer fee of a few hundred dollars.
Try a smaller balance over the same term
Questions people ask
Does a recast lower your interest rate?
No. The rate on the note does not change and neither does the maturity date. A recast lowers the monthly payment only, by spreading a smaller balance over the same remaining months at the same rate.
Is a recast better than paying extra principal?
They do different things. Extra principal keeps the payment and shortens the loan, which retires the balance faster and saves more interest. A recast keeps the payoff date and cuts the payment. Which fits depends on whether the goal is a smaller payment or fewer of them.