When it comes to managing your mortgage, there are various ways to adjust your payment terms or lower your monthly bills. Two of the most common options homeowners explore are mortgage recasting and mortgage refinancing. While both allow you to modify your mortgage in some way, they have key differences in terms of cost, process, and potential long-term impact. So, which one is right for you? Let’s dive into the details of mortgage recasting versus refinancing, and help you decide which option is better suited to your needs.
What is Mortgage Recasting?
Mortgage recasting is a process that allows you to reduce your monthly mortgage payments by making a lump-sum payment toward your loan balance. Essentially, you pay down a large portion of your remaining mortgage principal, and in return, your lender re-amortizes (or recalculates) your loan to reflect the new, smaller balance. This results in a lower monthly payment based on the reduced principal, but your interest rate and loan term remain the same.
Key Features of Mortgage Recasting:
- Lump-Sum Payment: To recast your mortgage, you typically need to make a substantial lump-sum payment, often in the range of $10,000 to $100,000 or more, depending on your mortgage balance.
- No Change to Interest Rate or Loan Term: The main difference between recasting and refinancing is that recasting doesn’t change your loan’s interest rate or term. It simply lowers the balance of the loan, which reduces your monthly payment.
- One-Time Fee: Some lenders may charge a small fee for recasting, but it is usually much lower than the fees associated with refinancing.
- Simple Process: Mortgage recasting is generally a simpler process than refinancing. It usually doesn’t involve a credit check, income verification, or extensive paperwork.
What is Mortgage Refinancing?
Mortgage refinancing, on the other hand, involves taking out a new loan to replace your existing mortgage. With refinancing, you can adjust several aspects of your loan, including your interest rate, loan term, and even the type of mortgage (for example, switching from an adjustable-rate mortgage to a fixed-rate mortgage). Refinancing gives you more flexibility to tailor the loan to your current financial situation or long-term goals.
Key Features of Mortgage Refinancing:
- New Loan with New Terms: When you refinance, you essentially pay off your existing mortgage with a new one, which can come with a different interest rate and a new loan term.
- Change in Interest Rate: Refinancing gives you the opportunity to take advantage of lower interest rates, which can reduce your monthly payments and save you money on interest over time.
- Change in Loan Term: You can choose to shorten your loan term (e.g., from a 30-year to a 15-year mortgage) to pay off your home faster, or extend your loan term (e.g., from a 15-year to a 30-year mortgage) to reduce your monthly payments.
- Closing Costs: Refinancing typically involves closing costs, which can be anywhere from 2% to 5% of the loan amount. These fees include application fees, title insurance, appraisal fees, and other charges. However, in some cases, these fees can be rolled into the loan balance or negotiated with the lender.
- Credit Check and Income Verification: Because refinancing is like getting a new mortgage, lenders will typically require a credit check, income verification, and other documentation, similar to the process when you first took out your mortgage.
Key Differences: Recasting vs. Refinancing
Now that we understand what each option entails, let’s break down the key differences between mortgage recasting and refinancing:
| Feature | Mortgage Recasting | Mortgage Refinancing |
|---|---|---|
| Lump-Sum Payment | Requires a lump-sum payment to reduce the loan balance | No lump-sum payment required; new loan is taken out |
| Interest Rate | No change to interest rate | Potential for a lower interest rate |
| Loan Term | No change to loan term | Loan term can be adjusted (e.g., shorter or longer) |
| Fees | Typically low fees (if any) | Higher fees (2%–5% of the loan amount) |
| Qualification Process | Simple process, no credit check required | Full qualification process (credit check, income verification) |
| Impact on Loan Balance | Reduces loan balance, lowering monthly payments | Refinances entire loan balance, possibly with a different principal |
| Flexibility | Less flexibility (only reduces payments) | More flexibility (can change terms, interest rate, etc.) |
When Should You Consider Mortgage Recasting?
Mortgage recasting can be an excellent option if you’ve recently come into a large sum of money (e.g., from a bonus, inheritance, or sale of an asset) and want to reduce your mortgage payments without going through the hassle of refinancing. It is ideal if you:
- Have a Lump Sum of Money: If you’ve come into a significant amount of cash, such as from savings, selling an asset, or a financial windfall, and you want to use it to lower your mortgage payment, recasting could be a good fit.
- Don’t Want to Change Your Interest Rate or Loan Term: If you’re happy with your current interest rate and loan term, and just want to lower your monthly payments, recasting can provide the relief you need without requiring you to go through a complicated refinancing process.
- Prefer a Simpler Process: If you want a more straightforward and cost-effective solution, recasting is generally a faster and less expensive process compared to refinancing.
When Should You Consider Mortgage Refinancing?
Mortgage refinancing is a better choice if you’re looking for more flexibility or want to make changes to your mortgage. Refinancing is ideal for you if:
- You Want to Lower Your Interest Rate: If mortgage rates have dropped since you first took out your loan, refinancing can allow you to lock in a lower rate, which can result in significant savings over time.
- You Want to Change Your Loan Term: If you want to pay off your loan faster (e.g., switch from a 30-year mortgage to a 15-year mortgage) or extend your loan term to lower your monthly payments, refinancing gives you that option.
- You Want to Tap Into Home Equity: If you want to pull cash out of your home to fund renovations, pay off debt, or make other big purchases, a cash-out refinance could help you access that equity.
- You’re Looking for a Different Type of Mortgage: If you have an adjustable-rate mortgage (ARM) but want the stability of a fixed-rate mortgage, refinancing gives you the opportunity to switch mortgage types.
Which Is Better for You?
Ultimately, the decision between mortgage recasting and refinancing depends on your goals and financial situation. Here are a few guiding questions to help you decide:
- Do you have a large lump-sum payment available to lower your mortgage balance? If so, recasting might be the right choice.
- Are you looking to take advantage of lower interest rates, change your loan term, or access home equity? If yes, refinancing might be the better option.
- Is your goal to reduce monthly payments without much hassle? If you want simplicity and don’t need to make drastic changes to your loan, recasting could be the more efficient option.
- Are you willing to pay closing costs for a potentially lower rate or different loan terms? If you can afford the upfront costs and want more flexibility, refinancing might be worth considering.
Conclusion
Both mortgage recasting and refinancing offer ways to adjust your mortgage, but they serve different purposes and come with distinct pros and cons. If you have a lump sum of money available and simply want to lower your monthly payments without changing your loan terms, mortgage recasting could be the perfect solution. On the other hand, if you’re looking to take advantage of lower interest rates, adjust your loan term, or access home equity, refinancing may be the better fit.
Carefully evaluate your financial goals, the amount of cash you have on hand, and your long-term mortgage strategy to make the best decision for your situation.
