What Is a Mortgage Recast?

A mortgage recast—also called a loan 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, the borrower pays a large sum toward their principal, and their mortgage is then recalculated based on the new balance. 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.

Key Takeaways

  • A mortgage recast or loan recast is when a borrower pays a large sum toward their mortgage's principal, resulting in the lender recalculating the loan based on the new balance.
  • When the lender recalculates the loan, they will create a new amortization schedule, which is a table of loan payments showing the principal and interest that comprises each payment until the loan is paid in full.
  • The main benefit to the borrower of recasting a mortgage is the opportunity to reduce monthly payments.
  • Negative amortization loans or option adjustable-rate mortgages (option ARM) frequently have a mortgage recast clause as part of the loan contract.

How a Mortgage Recast Works

For the borrower, the primary benefit of recasting a mortgage is to reduce monthly payments. Recasting also reduces the amount of interest the borrower will pay over the life of the loan. It can also 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. There are many reasons why homeowners refinance.

  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 a home's equity to finance a large purchase.
  5. The desire to consolidate debt.

Unlike refinancing a mortgage, recasting a mortgage will not lower the interest rate on your mortgage.

Types of Mortgages Which 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 which 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 principal balance of the loan, leading to a situation where the principal owed increases over time instead of decreases.

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. Additionally, negative amortization mortgages have triggers that might cause an unscheduled recast to occur. For example, if the principal balance of the loan reaches a set limit through negative amortization, a recasting of the mortgage is triggered.

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, 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 have a recast option included, you can approach your lender to see if a mortgage recast will benefit you. A loan recast may lower your monthly payments. By paying a lump sum and recasting your mortgage, you can reduce your housing costs; whereas if you submit a lump sum without recasting, you lower your balance but your monthly payments will remain the same.

As an example, you have a $500,000, 30-year fixed-rate mortgage with a 4% interest rate. Your combined interest and principal payment are $2,338 per month. After five years, you receive a windfall lump sum of $375,000. However, if you decided to use that lump sum to pay down the mortgage without recasting the mortgage, you would continue to pay $2,338 a month. If you recast the loan over the remaining 25-years of the mortgage, the monthly payment would go down to $1,507.