Is It Better to Recast or Pay Down Principal?

When homeowners come into extra money—whether from a bonus, inheritance, or selling an asset—they often wonder how best to use that cash to improve their mortgage situation. Two common options are recasting the mortgage or simply making extra principal payments. Both strategies can help reduce the financial burden of a mortgage, but they work differently. Let's explore which option might be better for your situation.

Recasting Your Mortgage

Mortgage recasting involves making a large lump-sum payment toward the principal, after which the lender recalculates your monthly payments based on the new, lower balance. However, your interest rate and loan term remain the same.

Benefits of Recasting:

• Lower monthly payments: The most immediate benefit of recasting is that your monthly mortgage payment decreases because the new balance is spread across the same loan term.
• No need to refinance: Recasting allows you to keep your existing loan terms, including the interest rate, and avoid the costs associated with refinancing.
• Preserve cash flow: If lowering your monthly payment is important for budgeting or increasing monthly cash flow, recasting is a great way to achieve this.
• Lower fees than refinancing: Recasting typically involves a small one-time fee, often between $150 and $500, which is much lower than the closing costs of refinancing.

However, recasting isn’t available for all loans, particularly government-backed mortgages like FHA, VA, and USDA loans. Also, not all lenders or loan servicers offer recasting, so you’ll need to confirm that this is an option for your mortgage.

Paying Down Principal

Paying down principal is another option that involves making extra payments directly toward the mortgage’s principal balance. These payments go beyond the required monthly payment and reduce the amount of interest you pay over the life of the loan. Unlike recasting, paying down principal doesn’t involve recalculating your monthly payment.

Benefits of Paying Down Principal:

• Reduce overall interest costs: Paying down your principal reduces the amount of interest you’ll pay over time because your interest is calculated on a smaller balance.
• Pay off your mortgage faster: Regular extra principal payments can help you pay off your mortgage more quickly, reducing the loan term.
• More flexibility: You can make extra payments on your schedule, in any amount, without a formal process or fees. There’s no need for a large lump sum to make an impact.
• Available for all loan types: Unlike recasting, paying down principal is available for any type of mortgage, including FHA, VA, and USDA loans.

However, making extra principal payments doesn’t lower your monthly payment. Instead, you’ll continue making the same monthly payment, but more of it will go toward principal rather than interest.

Key Differences Between Recasting and Paying Down Principal

• Monthly Payments: Recasting reduces your monthly payment, while paying down principal keeps the same payment but reduces the overall interest paid.
• Loan Term: Recasting doesn’t shorten your loan term; paying down principal can shorten it if you continue making the same monthly payments.
• Flexibility: Paying down principal offers more flexibility, allowing you to make extra payments whenever you want, while recasting requires a formal process and often a large lump-sum payment.
• Cost: Recasting involves a small fee; paying down principal doesn’t have any fees.

When to Recast

Recasting makes the most sense if your priority is lowering your monthly payments. This might be ideal if:

• You’ve received a windfall of cash and want to reduce your monthly financial obligations.
• You’re satisfied with your current interest rate and don’t want to refinance.
• You plan to stay in your home for the long term and don’t mind keeping the same loan term.

Recasting is a great way to reduce your monthly payment without the complexity of refinancing or resetting your interest rate.

When to Pay Down Principal

Paying down principal is more effective if your goal is to pay off your mortgage faster or reduce the total interest paid over the life of the loan. This option is best if:

• You want to shorten your loan term by continuing to make extra payments.
• You don’t need or want to reduce your monthly payment but are focused on becoming debt-free sooner.
• You have a government-backed loan that doesn’t allow recasting, but you still want to reduce your mortgage balance.

Paying down principal is also more flexible and doesn’t require any formal process, making it ideal for homeowners who want to gradually reduce their mortgage without needing to come up with a large lump sum.

Final Thoughts: Recast or Pay Down Principal?

Choosing between recasting and paying down principal depends on your financial goals. If you’re looking to reduce your monthly payments and improve cash flow, recasting is likely the better option. On the other hand, if you’re focused on paying off your mortgage faster and reducing total interest, making extra payments toward the principal is more effective.