Recasting Your Mortgage After a Liquidity Event

A senior IC has a $1.5M mortgage at 3.5%, originated in 2021 when rates were low. Their company IPOs in 2025 and they net $2M from selling vested shares. They want to pay down $800K of the mortgage. What’s the best structure?

Refinancing at current rates (around 7%) makes no sense, they’d lose the 3.5% rate. Just paying $800K against the principal keeps the rate but leaves the same high monthly payment (it just ends 8-10 years sooner). Selling the stock triggers $400K+ of capital gains.

Recasting is the right answer. The borrower pays a lump sum against the principal, the lender re-amortizes the remaining balance over the original remaining term, and the monthly payment drops proportionally. The rate and term don’t change.

What recasting actually does

A mortgage recast is a re-amortization of the remaining balance. Mechanics:

1. Borrower makes a lump-sum principal payment (usually $10K+ minimum)
2. Lender keeps the original interest rate and remaining term
3. Lender recalculates monthly payment based on new principal balance
4. Loan proceeds on new schedule at lower payment

Example: $1.5M loan at 3.5% fixed, 26 years remaining, monthly payment $7,572. Pay $800K down. New balance $700K. Recast over 26 remaining years at 3.5%: new payment $3,534. Savings: $4,038/month, or $48,456/year.

Recast vs paying extra to principal

Without recasting, an extra $800K against principal reduces the balance but doesn’t change the monthly payment. The loan just pays off years sooner.

Recasting actually reduces the monthly payment. For a borrower who wants lower monthly cash flow commitment (rather than faster payoff), this matters. Common reasons:

• Retired and want lower fixed costs
• Starting a business and want flexibility
• Using freed cash flow for other investments
• Building a reserve buffer

The dollar amount of principal reduction is identical either way. The difference is just amortization schedule.

Recast fees

Most lenders charge $150-$500 for a recast. Some large banks charge $0 (Wells Fargo, Chase historically; verify with your specific lender). Credit unions often offer free recasting.

Non-recastable products:

• FHA loans (generally don’t recast)
• VA loans (similarly restrictive)
• Some adjustable-rate mortgages
• Some jumbo products from specific lenders

Before making the lump payment, confirm with your specific servicer that recasting is available on your loan. Some loan documents explicitly allow or disallow recasting.

Minimum payment thresholds

Most recasting programs require a minimum lump payment:

• Traditional conforming: $5K-$10K minimum
• Most jumbo: $10K-$20K minimum
• Private bank mortgages: often higher minimums

Some programs also require the loan to drop to specific LTV thresholds after the payment. An underwater loan can’t be recast at most lenders.

Recasting vs refinancing

Refinancing replaces the existing loan with a new one at current rates. Recasting keeps the existing loan and just re-amortizes.

Refinancing makes sense when:

• Current rates are meaningfully below the existing rate
• You want to change terms (15-year to 30-year, fixed to ARM)
• You want to extract equity (cash-out refi)

Recasting makes sense when:

• Current rates are higher than your existing rate
• You have a lump sum to apply
• You want lower payment without changing other terms

For borrowers with sub-4% rates originated in 2020-2021, recasting preserves a now-rare rate that can’t be replicated in 2025-2026.

Tax treatment of the recast

The recast itself isn’t a taxable event. The lump-sum paydown is just a return of principal. No gain, no loss.

Mortgage interest deduction continues on the smaller balance, subject to the $750K acquisition indebtedness cap under the Tax Cuts and Jobs Act. If your balance was already below $750K, recasting doesn’t change deductibility. If your pre-recast balance exceeded $750K but post-recast balance is below, you now deduct 100% of interest (previously pro-rated).

Liquidity-event sequencing

For an IPO-year recast, the sequence usually looks like:

1. IPO fires, RSUs vest, tax hit lands as ordinary income
2. Wait for 180-day lockup to expire
3. Sell enough stock to cover the intended paydown (realizing long-term gains)
4. Pay capital gains tax on the sale (often needs to be set aside)
5. Make the lump-sum payment to the mortgage servicer
6. Request recast, pay the recast fee
7. New lower payment kicks in

This is often done in the year after the IPO, so the capital gains sit in a calendar year separate from the peak ordinary-income year.

Structural alternatives

Instead of recasting, some borrowers consider:

Pay down with SBLOC, keep stock. Keep the concentrated position, borrow against it at 5-6%, pay down the mortgage. Swap mortgage debt at 3.5% for SBLOC debt at 5.5%. Doesn’t usually improve cash flow unless your tax situation makes the SBLOC interest deductible as investment interest.

Invest the cash instead. If mortgage is 3.5% and expected investment returns are 6-8%, investing the $800K rather than paying down is mathematically better in expected value. The counter-argument: deleveraging is risk reduction, not just return comparison.

Exchange fund contribution. Contribute concentrated stock to an exchange fund for 7-year lockup plus deferred tax. Mortgage stays as-is. Different optimization problem.

Frequently asked

Can I recast multiple times? Yes, most servicers allow multiple recasts over the loan life, subject to the minimum payment amount each time. Each recast costs the administrative fee.

Does recasting affect my credit score? No. The loan stays on your credit report with the same account number. Monthly payment just decreases.

What if my loan is in a mortgage-backed security pool? Doesn’t matter to you. The servicer handles the recast administratively. The investor pool receives their scheduled principal plus the lump payment.

Does the §6501 statute apply to recasts? Not directly. The lump payment isn’t a taxable event. The §6501 3-year assessment period applies to whatever tax returns reported the capital gains from stock sales funding the payment.

How does this interact with IRMAA? The stock sale to fund the recast generates capital gains, which count toward MAGI and IRMAA two years later. For a 63-year-old retiree, a $500K gain to fund a recast could push IRMAA to top tier at age 65. Spread the sale across multiple years or use DAF donations to offset AGI.