Mortgage Recast vs. Refinance
Ready to save some money on your mortgage? That’s great – you’ve got several options, and it’s important to pick the one that best fits your finances. For many borrowers, the choice is between recasting a mortgage and refinancing. Either way, you can end up with a lower monthly payment and you’ll (ideally) save money in interest costs, but there are pros and cons to each choice.
If cash flow is not a problem for you, it’s probably better (in a financial sense) in most situations to recast or simply prepay your mortgage.
Recasting vs. Refinancing
What’s the difference between recasting and refinancing your home loan? A quick definition might help.
Recasting happens when you pay down a substantial amount of your loan balance (sometimes with a large lump-sum, and sometimes with regular extra payments) and you change your existing loan. Your lender will re-calculate your monthly payments based on a new, lower loan balance. Because your loan balance is smaller, you’ll pay less in interest over the remaining life of your loan. You’ll also enjoy increased cash flow as a result of your lower monthly payment.
Refinancing happens when you get a brand new loan and use it to pay off your existing loan. To be precise, your new lender makes a payment directly to your old lender, and you start making payments to your new lender. Your loan will (hopefully) be smaller than it was when you originally borrowed, so you should have a lower monthly payment.
In addition, it probably only makes sense to refinance if you’re getting a lower interest rate, so you might spend less on interest (but you could end up spending more).
Pros and Cons of Recasting
The main advantage of recasting is simplicity. Your lender probably has a program that allows you to recast fairly painlessly.
They’ll charge a modest fee, which you should easily be able to cover with the savings you get, and they’ll have a set of rules (such as how much you need to pre-pay before you can recast).
To recast your loan, you don’t need to qualify in the same way you’d need to qualify for a new loan (which can be a lot of work, and it might not be possible in your current situation). You don’t need to provide proof of income, document your assets (and where they came from), or make sure your credit scores are in tip-top shape. You already have the loan – you’re just asking for a re-calculation of the amortization schedule.
When you recast a loan, the interest rate does not change (but it might change if you refinance). There are several inputs used to calculate your monthly payment: the number of payments remaining, the loan balance, and the interest rate. When you recast, your lender only changes your loan balance.
Note that recasting a loan is not the same as loan modification. If you’re underwater and facing financial hardship, there might be other ways to change the terms of your loan or refinance.
Pros and Cons of Refinancing
The main reasons to refinance would be to get a lower monthly payment, customize your loan, and possibly get a lower interest rate (which might be challenging, depending on when you got your original loan).
However, a brand new loan could end up costing a lot more than a recast. For starters, you’ll have to pay closing costs (such as appraisal fees, origination fees, and so on). But the real cost might be the increased interest you pay. If you stretch out your loan over a long period of time – by getting another 30 year loan after you’ve been paying down your existing loan for the last 15 years – you’ll 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 years.
To see an example of how you’ll pay principal and interest, run some numbers with a loan amortization calculator.
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’ll have the ability to make smaller payments, which might feel nice, but you won’t pay off your loan any faster. If you refinance, you might actually pay off your loan later than you were going to, and that only puts off the inevitable. But if you prepay and continue making the original monthly payment, you’ll save money on interest and pay off your mortgage early.