Mortgage Recast vs. Refinance: Which is Best?
If you’re looking to save money on your mortgage, you have several options. Refinancing and recasting a mortgage will both bring savings, including a lower monthly payment and the potential to pay less in interest costs. But the mechanics are different, and there are pros and cons with each choice, so it’s critical to choose the right one.
If cash flow is not an issue—and you have no problem with your monthly payment—the choice might be easy: It’s typically better to recast or simply prepay your mortgage if you just want to minimize interest charges.
Recasting vs. Refinancing
What’s the difference between recasting and refinancing your home loan? Let’s compare and contrast.
Recasting happens when you change your existing loan after prepaying a substantial amount of your loan balance. For example, you might make a sizeable lump-sum payment, or you may have added extra to your monthly mortgage payments—putting you well ahead of schedule on your debt repayment. Your lender can recalculate your monthly payments based on your low loan balance, resulting in a lower required monthly payment. Because your loan balance is smaller, you’ll also pay less in interest over the remaining life of your loan.
Refinancing happens when you apply for a new loan and use it to replace an existing mortgage. Your new lender makes a payment directly to your old lender, and you pay your new lender going forward. Your loan should be smaller than it was when you originally borrowed, so you enjoy a lower monthly payment. In most cases, it only makes sense to refinance if you’re getting a lower interest rate, so you could spend less on interest (but you might end up spending more—see below).
Pros and Cons of Recasting
The main advantage of recasting is simplicity. Your lender probably has a program that makes recasting easier than applying for a new loan. Lenders charge a modest fee for the service, which you should more than recoup after several months of improved cash flow.
Approval: Qualifying for a recast is different from qualifying for a new loan, and you might get approved for a recast even when refinancing is impossible for you. You already have the loan—you’re just asking for a re-calculation of the amortization schedule.
- You don’t need to provide proof of income, document your assets (and where they came from), or make sure that your credit scores are free of problems.
- Lenders may require that you prepay a minimum amount before you qualify for recasting.
- Government programs like FHA and VA loans generally don’t qualify for recasting.
- Recasting for jumbo loans is not available from all lenders.
Interest rate and payment: When you recast a loan, the interest rate does not change (but it usually changes when you refinance). Several inputs determine your monthly payment: The number of payments remaining, the loan balance, and the interest rate. But when you recast, your lender only changes your loan balance.
Pros and Cons of Refinancing
Like recasting, refinancing also lowers your payment (usually), but that’s because you re-start the clock on your loan.
New features: The primary reasons to refinance are to secure a lower monthly payment, change the features on your loan, and possibly get a lower interest rate (but lower rates might not be available, depending on when you borrow). If you get a brand new loan, you get to choose how long the loan is structured: Will it be a 30-year mortgage, a 15-year fixed-rate loan, or an adjustable rate mortgage (ARM)?
Higher costs: A brand new loan typically costs more than a recast.
- You have to pay closing costs, including appraisal fees, origination fees, and more.
- A more significant cost might be the extra interest you pay. If you stretch out your loan over a long period of time—getting another 30-year loan after paying down your existing loan for several years—you have to start from scratch. With most loans, you pay more interest in the early years, and you pay down most of the principal in later years. A new long-term loan will put you back in those early, interest-heavy years.
To see an example of how you pay principal and interest, run some numbers with a loan amortization calculator.
Alternative: Don’t Do Either
If you really want to save money, the best choice might be to pass on recasting and refinancing. Instead, prepay your mortgage (whether in a lump-sum or over time), and keep making the large required payments as well.
If you recast, you gain the ability to make smaller payments, which might feel nice—but you don’t pay off debt any faster. If you refinance, you might actually pay off your loan later than you were going to originally, and you keep paying interest along the way. But if you prepay and continue making the original monthly payment, you’ll save money on interest and pay off your mortgage early.