If your monthly mortgage payment no longer fits your lifestyle or financial goals, you may be able to change it with mortgage refinancing or recasting. Recasting and refinancing are two ways a borrower can save on mortgage costs — sometimes a jaw-dropping amount. To understand which might be best for you, it helps to understand the difference between them and the pros and cons of recasting your mortgage vs. refinancing.
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Key Points
• Mortgage recasting involves making a large payment toward the principal and recalculating monthly payments on the remaining balance.
• Refinancing replaces an existing mortgage with a new one, potentially with different terms and rates.
• Recasting keeps the original loan’s term and rate but lowers monthly payments due to the reduced principal.
• Refinancing can lower interest rates and monthly payments, and it may allow for cash-out options.
• Both options aim to reduce mortgage costs, but the best choice as to whether to recast vs. refinance a mortgage depends on individual financial situations and goals.
The Difference Between Recast and Refinance
Recasting is the reamortizing of an existing mortgage, meaning the lender will recalculate your monthly payments. Refinancing involves taking out a completely new mortgage with a new rate, and possibly a new term, and paying off your old mortgage in the process.
Recasting
If your lender offers mortgage recasting and your loan is eligible, here’s how it works: You make a large lump-sum payment — $10,000 might be required — toward the principal balance of your mortgage loan. The lender recalculates the monthly payments based on the new, lower balance, which shrinks the payments. The lender may charge a few hundred dollars to reamortize the loan.
Mortgage recasting does not change your loan length or interest rate. But because your principal amount is lower, you’ll have lower monthly payments and will pay less interest over the life of the loan.
If you were to put a chunk of money toward your mortgage principal and not recast the loan, your payments would not change, though the extra principal payment would reduce your interest expense over the life of the loan.
Who might opt for mortgage recasting? Someone who has received a windfall and wants to put it toward the mortgage might like this option. Sometimes it’s someone who has bought a new home before selling the previous one. Once the old home is sold, the homeowner can use some of the proceeds to recast the new mortgage.
Another candidate for recasting might be someone who wants to use the lump sum to pay their loan down to 80% of the home’s value so they can request to stop paying for private mortgage insurance (PMI) or get it automatically dropped (when they reach 78%).
FHA, VA, and USDA loans are not eligible for mortgage recasting. Some jumbo loans are also excluded. If you want to change the monthly payments on those types of mortgages, you’ll need to refinance your loan.
Refinancing
When you seek refinancing, you’re applying for a brand-new loan with a new rate and terms, possibly from a new lender. Most people’s goal is a lower interest rate, a shorter loan term, or both.
While finding a competitive offer might take some legwork, refinancing could help you save money. A lower interest rate for a home loan of the same length will reduce monthly payments and the total amount of interest paid over the life of the loan.
A homeowner who refinances to a shorter term, say from 30 years to 15, will pay much less total loan interest. Fifteen-year mortgages also often come with a lower interest rate than 30-year home loans.
Refinancing may make sense for homeowners who are planning to stay put for years; those who want to switch their adjustable-rate mortgage to a fixed-rate one; and borrowers with FHA loans who want to shed mortgage insurance premiums (MIP), on a loan they’ve paid down or a home that has appreciated. Most FHA loans carry mortgage insurance for the life of the loan. Equity-rich homeowners who’d like to get their hands on cash may find cash-out refinancing appealing.
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Pros and Cons of Mortgage Recasting
There are both positive and negative aspects to mortgage recasting.
Pros of Recasting
Mortgage recasting lowers your monthly mortgage payments and lets you save on total loan interest while keeping the same interest rate. Since you recast your mortgage with your existing lender, the process is pretty straightforward, and the cost could be as low as $150.
Cons of Recasting
There are some potential drawbacks to mortgage recasting, as well. Making a large lump-sum payment means you could be trading liquidity for equity – and creating financial instability if unexpected expenses arise or if the housing market takes a downward turn.
If you have other debts with higher interest rates, you may want to avoid mortgage recasting. It could make more sense to use the money you would put toward the principal to pay down your higher-interest debt first.
“No matter what method works best for you, it’s important to cut spending as much as you can while you’re tackling your debts,” said Kendall Meade, a Certified Financial Planner at SoFi.
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Pros and Cons of Mortgage Refinancing
Mortgage refinancing also has upsides and downsides.
Pros of Refinancing
If you are eligible to refinance, you won’t need a large cash source in order to lower your mortgage payments. Instead, your main goal is to qualify for a lower interest rate. If you succeed, you will save a lot of money in interest over time.
With a cash-out refi, you can tap your home equity and use that money for whatever you need to do: pay down higher-interest debt, add to the college fund, or remodel your kitchen.
Cons of Refinancing
Reducing your loan term with a refi could result in a higher mortgage payment, even though it can let you save total interest over the life of the new loan.
Refinancing involves closing costs, which could range from 2% to as much as 6% of the remaining principal. You’re taking out a new mortgage, after all. Some lenders will let you roll closing costs into your loan, though this may raise your interest rate or your loan balance.
To figure out whether a refinance might be worth the price of closing costs, it’s a good idea to calculate the break-even point, when interest savings will exceed closing costs. Everything beyond that break-even point will be savings.
💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.
When to Choose Recasting Over Refinancing
Recasting vs. refinancing can seem like a tough choice. But there are a number of situations in which a recast may make more sense.
• You’ve gotten a windfall and don’t have other pressing financial issues. A recast allows you to cheaply and easily reduce your monthly payments.
• You have a better rate on your mortgage than you could get today. A recast will let you keep that rate, while reducing your payments.
• You’re self-employed or have poor credit and would have difficulty qualifying for a mortgage refinance, but you want to lower your monthly payments.
• You want to lower your monthly payments with a cheaper, faster process than a refinance.
Factors to Consider Before Making a Decision
As you contemplate getting a mortgage recast vs. a refinance, there are a few things to keep in mind.
Loan Type and Lender Policies
It may sound appealing to recast vs. refinance your mortgage but only conventional loans are eligible. If you have a government-backed loan – like a VA home loan or an FHA mortgage – you may need to consider a refinance vs. a recast.
Even if you do have a conventional loan, you’ll still need to find out if your lender offers mortgage recasts (not all of them do). If your lender does provide mortgage recasts, ask what your lender’s requirements are and see if you meet them. Typically, lenders may want:
• A minimum payment toward principal – typically $10,000
• Sufficient home equity, as determined by the lender
• Good financial standing, meaning that you have built up a history of on-time payments
Long-Term Financial Goals
Before you decide on mortgage recasting vs. refinancing, you’ll want to review which process aligns better with your long-range plans.
Say you’re planning an early retirement. If you’d really like to pay off your mortgage soon and not have to budget for that monthly payment any longer, you may want to consider a mortgage refinance vs. a recast. It will let you adjust your interest rate and loan term. And though closing costs are more expensive than a recast servicing fee, a refinance can let you pay your loan off earlier.
However, if you’re planning to work for the next 30 years but would like to pay less each month and save on your overall interest, a mortgage recast vs. a refinance may make sense for you. That’s especially true if you’ve gotten a windfall – from a bonus at work or from selling a previous home, for instance – and don’t have other pressing debts or needs.
A recast may also be appealing if you already have a great interest rate and probably couldn’t get a better one, for instance. Or if you just started a business and don’t have the kind of documentable financial stability a lender would want to see before giving you a refinance. In these situations, you may want to consider recasting your mortgage vs. refinancing.
The Takeaway
A mortgage recast vs. refinance: different animals with similar aims. A recast requires a lump sum upfront but will shrink payments and total loan interest. A mortgage refinance may greatly reduce borrower costs and sometimes free up cash or shorten the loan term. The one that is right for you will depend on your current loan terms and your available cash, among other factors.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
Can you recast and refinance at the same time?
Not exactly. However, a cash-in refinance combines characteristics of both, letting you make a large payment toward your principal as you get a new home loan. This allows you to get new and, ideally, more favorable terms on a smaller loan, which can save you money. You will, however, have to pay closing costs.
Can you recast any type of mortgage loan?
No. You can recast conventional loans, but not government-backed loans like FHA or VA mortgages. Some lenders may recast jumbo loans.
Does recasting your mortgage affect your interest rate?
Unlike refinancing, recasting your mortgage doesn’t change your interest rate or your loan term.
Are there fees associated with a mortgage recast?
There may be service fees for a mortgage recast, but those are typically no more than a few hundred dollars.
When is refinancing better than recasting?
You may be better off with a refinance vs. a recast if you are interested in paying your loan off earlier than originally planned, if you can get a better interest rate now, or if you don’t have a significant lump sum to put toward your loan principal.
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