Key Requirements for Recasting Your Mortgage

Recasting a mortgage can be an effective way to reduce monthly payments and improve cash flow without the need for a full refinance. However, not every homeowner qualifies for this option. If you’re thinking about recasting your mortgage, here’s a detailed look at what you’ll need to meet the necessary requirements.

1. Understanding Which Loans Qualify

The first thing to know about mortgage recasting is that it’s not available for every type of loan. Generally, conventional and conforming loans are eligible, meaning loans that meet the standards set by Fannie Mae or Freddie Mac. These types of loans are widely available through most private lenders.

However, if you have a government-backed loan, such as an FHA, VA, or USDA loan, recasting isn’t an option. These loans are governed by strict federal rules that do not permit recasting. Homeowners with these types of loans will need to explore other options, such as refinancing or making additional payments toward the principal.

2. The Lump-Sum Payment Requirement

At the heart of mortgage recasting is the requirement to make a substantial lump-sum payment toward your loan’s principal balance. The exact amount varies by lender, but most will ask for a payment in the range of $5,000 to $10,000 or more. This lump sum significantly reduces the loan balance, which in turn reduces the amount you owe in monthly payments.

Keep in mind that the larger the lump-sum payment you make, the more your monthly payments will drop. This can be an attractive option if you’ve recently received a financial windfall—such as a bonus, inheritance, or proceeds from selling another property—and want to lower your mortgage obligations.

3. Maintaining a Solid Payment History

Your mortgage must be in good standing to qualify for a recast. This means that you need a track record of timely payments. Most lenders require that you have made all of your payments on time for at least the last 12 months. If you’ve had any recent delinquencies or late payments, your lender may reject your request for a recast.

For homeowners who’ve experienced financial hardship in the past but are now current on their mortgage, it’s essential to re-establish a strong payment history before considering a recast.

4. Meeting the Loan Balance Criteria

While a lump-sum payment can reduce your mortgage balance significantly, lenders often require a minimum remaining loan balance after the recast. This minimum varies, but most lenders will want to see that the loan balance remains above $50,000 to $100,000 after your payment.

The rationale here is simple: lenders want to ensure that the loan remains large enough to justify the administrative work of recalculating your payments. If your balance is already low, you may need to consider paying off the loan early or refinancing instead of recasting.

5. Fees You Need to Know About

Recasting isn’t free. Most lenders charge a recasting fee, though it’s much lower than the closing costs for a refinance. Typically, this fee ranges from $150 to $500, depending on your lender. This one-time fee covers the administrative costs of recalculating your amortization schedule and issuing new payment terms.

Be sure to ask your lender upfront about any fees associated with recasting, so you’re prepared for the cost before committing.

6. Ensuring Your Lender Participates

Even if your loan qualifies for recasting, not all loan servicers offer this service. Your loan servicer is the company that handles your mortgage payments, and they are the ones who must approve and process the recast. Some smaller or specialized lenders may not offer the option at all.

Before you make a lump-sum payment or get too far along in your plans, contact your loan servicer directly to confirm that they offer recasting. You’ll also want to ask about any specific policies they have regarding minimum payment amounts, fees, and processing time.

A Strategy for Conventional Loans

For those with conventional loans, recasting can be a simpler and cheaper alternative to refinancing. It doesn’t change your interest rate or loan term, but it can provide much-needed relief from high monthly payments. If your goal is to reduce monthly obligations without the hassle of refinancing or affecting your credit score, recasting could be an ideal solution.

Keep in mind that recasting doesn’t lower your interest rate, so if rates have dropped significantly since you first took out your loan, it might be worth exploring refinancing options. That said, for many homeowners, the ability to reduce payments without a full refinance is a compelling advantage.

Taking the Next Step

If you meet the requirements for mortgage recasting, this could be a valuable financial strategy to consider, particularly if you want to lower your monthly payments without changing your loan’s core terms. However, before proceeding, it’s crucial to have a conversation with your lender or loan servicer. Every lender has its own policies, and some may have specific requirements that go beyond the basics.