What Is a Mortgage Recast and Could It Help You Buy Before You Sell?

“I’d love to buy my next house before selling, but I need the money from this house to make it work.” Yup, this is a problem I hear all the time. There’s a surprisingly little-known mortgage strategy that can sometimes help: a mortgage recast.

I need to clarify right away that this solution isn’t some kind of magic. A mortgage recast doesn’t make the money from your current house appear in your bank account, and it also doesn’t automatically help you qualify for a second mortgage. 

What it can do is give you a way to buy your next home, sell your current home afterward, use the proceeds from that sale to pay down the new mortgage, and then lower your monthly payment through a recast.

First, what is a mortgage recast?

A mortgage recast is basically a mortgage do-over without getting a brand-new mortgage. You make a significant payment toward your existing mortgage principal, and your lender recalculates your monthly principal-and-interest payment based on the lower balance. Your interest rate and remaining loan term stay the same.

Example: Let’s say you buy a house with a $500,000 mortgage. Six months later, you sell your previous home and have $150,000 available from the sale that you want to put toward your new mortgage. Instead of simply making that $150,000 payment and continuing with the same monthly payment, you could ask your mortgage servicer whether the loan is eligible for a recast. If it is, the lender recalculates the payment using the lower mortgage balance. (It’s the same loan with the same interest rate, but a potentially lower principal balance and lower monthly payment.)

And yes, the details vary by lender and loan, so your first call should be to your mortgage servicer. Some lenders don’t offer recasts, and eligibility requirements can be completely different. 

Why would you want to recast after selling your old house?

Imagine you’re sitting in a home with a lot of equity. You know you want to move, but you also know your next house is going to be difficult to buy if you have to wait for your current house to close first.

This is something I see in my divorce work in particular. A divorcing client may need to establish where she is going to live next, but she may also need the marital home sold before she has enough cash available for the next purchase.

Often, the solution is to look at the entire financial picture rather than assuming the sale has to happen first. I’ve worked with divorcing clients where one spouse was able to qualify for a new mortgage before the marital home sold. Once that home is sold, the proceeds could then be used strategically for the next step.

You may also be interested in: Your Divorce Real Estate Questions Answered by Lauren

Mortgage recast vs. refinancing: what’s the difference?

People often lump these together because both can change your monthly mortgage payment, but they’re very different strategies. 

With a mortgage recast, you’re keeping your existing mortgage. You make a substantial principal payment, and the lender recalculates your payment based on the new balance. Your interest rate and remaining loan term stay the same, so if you have a fantastic mortgage rate from a few years ago, a recast can be particularly appealing. 

With a refinance, you’re replacing your existing mortgage with a new loan. That can give you a new interest rate, loan term, or loan structure, depending on what you’re trying to accomplish. You’ll also generally have closing costs and need to qualify for the new loan.

Here’s the simple version:

A mortgage recast isn’t always the right answer

I would never tell a client to recast simply because they can. You are taking a substantial amount of cash and putting it into your house. Once that money is sitting in home equity, it’s much less liquid.

So if putting $150,000 into your mortgage leaves you with no emergency fund, no money for renovations and no cushion for all the expenses that come with moving, I don’t care how much the monthly payment drops. We need to step back and look at the bigger picture.

There are also loans that may not be eligible for recasting. Government-backed loans (such as FHA, VA, and USDA loans) generally don’t have the same recast availability as conventional loans, and lender rules vary.

The questions I would ask your lender

Before you build a buying-before-selling strategy around a recast, I’d want clear answers to these questions:

• Does my loan qualify for a recast?
• How much principal do I need to pay down?
• Is there a recast fee?
• How quickly will my payment change?
• Will you allow me to recast after the proceeds from my home sale are applied?
• Will you still approve my new mortgage if my current house hasn’t sold yet?

So, could a mortgage recast help you buy before you sell?

A mortgage recast can potentially help you buy before you sell, but I’d think of the recast as part of the after-the-sale strategy, rather than the thing that makes the initial purchase possible.

The initial purchase still has to make financial sense, and you need to be able to handle the payments and qualify for the mortgage based on the circumstances your lender is actually underwriting.

Then, once your current home sells and you have the proceeds available, a recast may give you a way to put some of that equity into the new mortgage and reduce your monthly payment without giving up your existing interest rate.

Wondering whether buying before selling could work for you?

Let’s look at the whole picture before you make a move. I can help you think through your options, coordinate with your lender, and come up with a plan that makes financial sense. Reach out, and let’s talk through your situation.