Guides › Should You Use a Bonus or Windfall to Recast?

Should You Use a Bonus or Windfall to Recast?

Published October 14, 2026 · By the PrepayMath team

Not financial advice. This guide is for general education only. Examples use simplified assumptions (fixed rates, principal and interest only) and are not recommendations or rate quotes. Confirm details with your loan servicer, lender, or a licensed financial or tax professional before acting.

A bonus, inheritance, legal settlement or the sale of an investment can leave you with a lump sum and a decision. One option is to put it toward your mortgage and recast, which lowers your required payment for the rest of the loan. That's appealing, but it isn't automatically the best use of the money. This guide works through a realistic bonus example, including taxes, and lays out how to decide.

Step one: know how much you actually have

A $20,000 bonus usually doesn't arrive as $20,000. Bonuses are treated as supplemental wages. According to IRS Publication 15, the federal withholding rate on supplemental wages is 22% (37% for supplemental wages above $1 million in a calendar year). ^[source] State taxes, Social Security and Medicare may also be withheld, depending on where you live and your situation. Withholding isn't the same as your final tax bill, so your actual tax may be higher or lower when you file.

For simplicity, our examples look at both the full $20,000 and the amount left after only the 22% federal withholding, $15,600. Use the number that actually lands in your account.

Worked example: recasting with a bonus

You owe $280,000 at 6.5% with 26 years left. Your principal and interest payment is $1,861.77.

Using the full $20,000

• Recast payment (with a $250 fee): $1,728.79, which is $132.98 less a month
• Interest saved after the fee: about $21,241
• If you prepay the $20,000 and keep paying $1,861.77: paid off in about 21 years 10 months, saving about $74,090 in interest (about $73,840 after counting the $250 fee you'd have paid for a recast)

Using $15,600 after 22% federal withholding

• Recast payment: $1,758.04, which is $103.73 less a month
• Interest saved after the fee: about $16,513
• If you prepay and keep paying the old amount: paid off in about 22 years 8 months, saving about $59,882

What the numbers say

A recast gives modest monthly relief. A $15,600 to $20,000 lump sum lowers this payment by about $104 to $133 a month. That's helpful, but it's not life-changing on its own.

Keeping the old payment saves far more interest. In both versions, prepaying without recasting saves roughly three and a half times as much interest as recasting, because the loan ends years earlier.

Recasting doesn't change your rate or term. Fannie Mae's servicing rules describe a recast as lowering the principal and interest payment only, based on the current balance, rate and remaining term. ^[source] Your payoff date stays the same unless you voluntarily pay more.

Before the mortgage: the usual priorities

A windfall is a rare chance to strengthen your whole financial picture. Common priorities to check before sending it to your mortgage:

1. Emergency savings. Money in your home isn't easy to get back. The CFPB notes that people without savings often fall back on credit cards or loans when a financial shock hits. ^[source]
2. High-interest debt. Credit card balances usually cost far more than a mortgage. Paying them off is a bigger guaranteed return.
3. Retirement contributions and any employer match. A match is often an immediate return that's hard to beat.
4. Known upcoming expenses. A car, a roof or tuition. Using the windfall avoids borrowing for them later.

Recast, prepay or invest?

Choose a recast if…

• You want a permanently lower required payment for budget flexibility.
• Your rate is reasonable and you don't want to give it up by refinancing.
• Your emergency fund and other priorities are already covered.

Choose to prepay and keep your payment if…

• Your current payment is comfortable and you want the most interest savings and an earlier payoff date.
• You value being mortgage-free sooner.

Consider investing if…

• Your mortgage rate is low compared with what you realistically expect to earn after taxes.
• You're comfortable with market ups and downs. Investor.gov describes risk tolerance as your ability and willingness to lose some or all of your original investment in exchange for potentially greater returns. ^[source]
• You'll invest in a tax-advantaged account, or you understand the tax on gains. The IRS says the tax rate on most net capital gain is no higher than 15% for most individuals. ^[source]

Our pay off or invest calculator compares prepaying with investing for monthly cash. For a lump sum, the logic is similar: prepaying earns a guaranteed return equal to your mortgage rate, and investing has to beat that after taxes, with risk.

Splitting a windfall

You don't have to send everything to one place. Many households split it, for example topping up the emergency fund first, then putting part toward the mortgage and part into investments. If your servicer has a minimum lump sum for a recast, make sure the mortgage portion meets it, or simply make a principal prepayment without recasting.

Practical checks before you send the money

• Ask your servicer about recast rules: eligibility, minimum amount, fee and timing.
• Check for a prepayment penalty. The CFPB says penalties typically apply to paying off the whole loan within a set number of years, and sometimes to a large lump sum, so confirm before sending a big payment. ^[source]
• Mark the payment as principal and confirm it on your next statement.
• Set aside money for taxes if withholding may not cover your final bill.

A quick decision checklist

1. What's the after-tax amount that actually reached your account?
2. Is your emergency fund where you want it?
3. Do you have any debt with a higher rate than your mortgage?
4. Are you getting your full employer retirement match?
5. Do you need a lower required payment (recast), or do you want the most interest saved (prepay and keep paying)?
6. Does your servicer allow recasts, and does your lump sum meet its minimum?
7. Would you be comfortable seeing invested money fall in value for a while?

If you answer the first four and still want to use the money on your home, the recast calculator will show both the recast and keep-paying results side by side, so you can see exactly what each choice is worth.

The bottom line

Recasting with a windfall is a solid way to lower your required payment without refinancing, but it saves much less interest than prepaying and keeping your current payment. Start from the after-tax amount, cover emergency savings and high-interest debt first, and then decide between flexibility (recast), the most interest saved (prepay), or potential growth (invest).

See what your bonus does to your payment →

Not financial advice. This guide is for general education only. Examples use simplified assumptions (fixed rates, principal and interest only) and are not recommendations or rate quotes. Confirm details with your loan servicer, lender, or a licensed financial or tax professional before acting.