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Why the Mortgage Recast is the Best Tool for the Upgrading Homebuyer

May 3, 2023

Mortgage Recast Tool

Are you a homeowner wanting to upgrade? Maybe you have a lot of equity in your home but not a lot of cash to put down on a new home? Are you concerned that with a limited down payment, your monthly payment will not be budget-friendly?

If you answered “yes” to all the above, a mortgage recast may be suitable for you. With this option, you can purchase a new home in a seller’s market, get a budget-friendly payment, and complete the process with just ONE mortgage transaction.

What is a mortgage recast?

A mortgage recast is when a borrower makes a large, lump-sum payment on the principal of their existing mortgage after closing. The servicer re-amortizes the monthly payment based on the new principal balance and cancels the mortgage insurance (if applicable).

How does a recast work?


Step 1: Buy Your New Home

Peter and Alice have a home at 456 Jefferson Street. They owe $100,000 and will sell it for $250,000. Their new home at 789 Madison Street will cost $400,000. They will put 5% down ($20,000) and finance $380,000 with a conventional mortgage. They will take out a loan against their 401k—It’s just a loan and is not taxable. The payment will have mortgage insurance since they are not putting 20% down. We will address this in Step 3.

Step 2: Sell Your Old Home

Once they move into their new home on 789 Madison Street, Peter and Alice are ready to put 456 Jefferson Street on the market. They sell their old home for $250,000 and pay off the $100,000 mortgage. They still have $150,000 left from the sale. Now it’s time to recast their mortgage!

Step 3: Recast Your New Mortgage

Peter and Alice take the $150,000 from their sale and pay down (recast) their mortgage on their new home at 789 Madison Street, and pay back the loan taken out against the 401k. Servicing now changes the payment based on the new principal balance for the remaining term. Plus, with over 20% equity, there’s no mortgage insurance.

This is all done under the terms of the existing mortgage taken out in Step 1. There is usually an admin fee of $250.

How does the mortgage recast help?

In an inventory-challenged market with more buyers than sellers, if you have to write “contingent” on selling your existing home, your offer may not stand out. However, if a significant amount of your funds is tied up in your home’s equity, you will have a limited down payment, resulting in a monthly payment higher than you want. The mortgage recast solves all these issues and helps you upgrade your home in this market.

In conclusion, even with increasing rates, there is still a housing shortage. The mortgage recast is a valuable tool for the upgrading homebuyers to help limit costs.

Check out these related resources:
Bridge Loan Versus Recast
Reduce the Stress of Buying & Selling Simultaneously with a Mortgage Recast
Frequently Asked Questions about Buying Your Second Home

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