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Choosing Between a Mortgage Recast and a Mortgage Refinance

July 17, 2018 · 3 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Choosing Between a Mortgage Recast and a Mortgage Refinance

You probably remember the process of purchasing your house with a mix of emotions. There was the delight of finding just the right property, the frenzy of negotiations, and the anxiety of waiting for mortgage approval and home inspections.

Then there’s the excitement and pride that comes once you close on the house and finally get the keys. After moving and redecorating, you finally settle in and your house becomes a home. Unfortunately, you also need to settle in to pay a (potentially sizable) bill every month: your mortgage.

Chances are that in the years since you bought your home, the housing and financial markets have changed. And your income and expenses may have shifted in any number of ways. Your mortgage bill might start to seem like the only dreaded constant.

If your monthly payment no longer fits your lifestyle or financial goals, you may be able to change (and improve) it.

Figuring out the best way to reduce your payments can be a taxing process. We’re here to make it a little easier, so you can get back to living in your home rather than worrying about it. Here’s a quick guide comparing two common methods people use to save on their mortgages: mortgage recasting and mortgage refinancing.

What is a mortgage recast and how does it work?

The way it works: Mortgage recasting is offered by many mortgage lenders. First, check with your lender to see if it is an option they offer. Next, you’ll make a large lump-sum payment toward your principal. There may be additional fees associated with the process, amounting to a few hundred dollars, but for some homeowners it can be a relatively inexpensive way to achieve a smaller monthly mortgage payment.

What are the pros and cons of mortgage recasting?

Mortgage recasting can help you lower your monthly mortgage payment while keeping the same interest rate. Since you recast your mortgage with your existing lender, the process is pretty straight forward. You make the initial large payment, your remaining payments are recalculated based on your original interest rate and remaining loan term, and you’re all set. By paying a lump sum toward your mortgage, you have a lower loan balance, which could save you on interest in the long run.

There are some potential drawbacks to mortgage recasting, however. Making the large lump sum payment means you could be trading in liquidity for equity. Using your cash reserves to make the payment could hurt your finances if other unexpected expenses arise or if the housing market takes a downturn. If you do opt to recast your mortgage, it can be a good idea to make sure you keep a six-month emergency fund in cash savings.

If you have other debts with higher interest rates (like student loans), you may want to avoid mortgage recasting. In this case, it could make more sense to use that money to pay down your higher-interest debt first.

What’s the difference between mortgage refinancing and recasting?

When you recast, you’re recalculating your payment schedule after making a large payment, but you’re keeping the same lender and interest rate. When you refinance a mortgage, you’re applying for a brand new loan with new rates and terms and possibly from a new lender. So with refinancing, you’re seeking a lower interest rate, but you aren’t putting additional money down.

While finding a competitive offer might take some initial legwork, refinancing could help you save money and lower your monthly payments without having to pay a lump sum toward your house.

What are the pros and cons of mortgage refinancing?

Mortgage refinancing can be a lengthier process, simply because you have to shop for an offer with a better interest rate, and getting approved can take time. You will likely have to pay closing costs for the new loan. The offer you get will also depend on a variety of factors and your financial profile.

However, there may be many benefits to refinancing. If you are eligible to refinance, you won’t need a large cash source in order to lower your monthly payments. Instead, your goal is to qualify for a lower interest rate, which will save you a lot of money in interest payments over time.

You may also be able to refinance for more than you currently owe in order to have cash on hand. That’s called a “cash-out refinance.”

If you meet certain criteria, you could refinance for more than your remaining mortgage balance and take out some of that increased value in cash. Then you can use that money for whatever you need. Whether you use that cash to pay down student loans, start an educational trust for a child, or remodel your kitchen, taking equity out may help you build an even stronger financial future.

Ready to learn how much you could save by refinancing? Check out SoFi’s mortgage refinancing options and get a free rate quote in minutes.

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