In the present work the rheological, thermo-mechanical, microstructural, and wetting characteristics of cement mortars with recycled expanded polystyrene (EPS) were analyzed. The samples were prepared after partial/total replacement of the conventional sand aggregate with EPS having different grain size and size distribution. Lightness and thermal insulation were relevant features for all the bare EPS composites, despite the mechanical strengths. Specifically, EPS based mortars were characterized by higher thermal insulation with respect to the sand reference due to the lower specific mass of the specimens mainly associated with the low density of the aggregates and also to the spaces at the EPS/cement paste interfaces. Interesting results in terms of low thermal conductivity and high mechanical resistances were obtained in the case of sand-EPS mixtures although characterized by only 50% in volume of the organic aggregate. Moreover, sand-based mortars showed hydrophilicity (low WCA) and high water penetration, whereas the presence of EPS in the cement composites led to a reduction of the absorption of water especially on the bulk of the composites. Specifically, mortars with EPS in the 2–4 mm and 4–6 mm bead size range showed the best results in term of hydrophobicity (high WCA) and no water penetration in the inner surface, due to low surface energy of the organic aggregate together with a good particle distribution. This was indicative of cohesion between the ligand and the polystyrene as observed in the microstructural detections. Such a property is likely to be correlated to the observed good workability of this type of mortar and to its low tendency to segregation compared to the other EPS containing specimens. These lightweight thermo-insulating composites can be considered environmentally sustainable materials because they are prepared with no pre-treated secondary raw materials and can be used for indoor applications.