Mortgage Recast vs. Refinancing: Which Is the Better Option?

When looking to reduce your mortgage payments or adjust your loan, homeowners often consider two common options: mortgage recasting and refinancing. While both strategies can help lower your monthly payments, they work in different ways and are suited to different financial goals. Understanding the differences between recasting and refinancing can help you choose the best option for your situation.

What Is Mortgage Recasting?

Mortgage recasting is a process where you make a lump-sum payment toward the principal balance of your mortgage, and the lender recalculates your monthly payments based on the new, lower loan balance. Importantly, your interest rate and loan term remain the same, but the lower balance results in smaller monthly payments.

Key Features of Mortgage Recasting:

• Lump-Sum Payment: You must make a significant payment toward your loan’s principal, typically at least $5,000 to $10,000.
• Lower Monthly Payments: Your monthly payments decrease, but your interest rate and loan term remain unchanged.
• Lower Fees: There’s typically a one-time recasting fee, usually between $150 and $500—far less than refinancing costs.
• Simpler Process: Recasting doesn’t require a credit check or appraisal and is generally quicker and easier than refinancing.
• No Change in Loan Terms: Your interest rate, loan duration, and amortization schedule stay the same.

What Is Refinancing?

Refinancing is the process of replacing your existing mortgage with a new loan. This allows you to change key terms, such as your interest rate, loan term, or both. Homeowners often refinance to secure a lower interest rate or switch to a different loan type, like moving from a 30-year mortgage to a 15-year mortgage.

Key Features of Refinancing:

• New Loan Terms: Refinancing gives you the chance to change your interest rate, loan term, or both.
• Potential for Lower Interest Rates: If interest rates have dropped since you took out your mortgage, refinancing allows you to lock in a lower rate.
• Loan Reset: Refinancing starts a new loan, which may mean a new 15- or 30-year term, depending on the new loan agreement.
• Closing Costs: Refinancing typically involves higher upfront costs, including appraisal fees, loan origination fees, and closing costs, which can range from 2% to 5% of the loan amount.
• Credit Check Required: Refinancing involves a full application process, including a credit check, income verification, and often a home appraisal.

Mortgage Recast vs. Refinancing: Key Differences

Both mortgage recasting and refinancing can help lower your monthly payments, but they have important differences. Here’s a breakdown of the key factors to consider:

1. Monthly Payment Reduction

• Recasting: Reduces your monthly payment by lowering the loan balance, without changing your interest rate or loan term.
• Refinancing: Can reduce your monthly payment by securing a lower interest rate or extending your loan term.

When to choose:

If your goal is purely to lower your monthly payment and you have a large lump-sum payment available, recasting may be the simpler and cheaper option. Refinancing is better if you want to reduce your interest rate or adjust the loan term.

2. Interest Rate

• Recasting: Does not change your interest rate. You keep your original loan’s interest rate, whether it’s high or low.
• Refinancing: Allows you to secure a new interest rate. If current market rates are lower than what you’re paying, refinancing can significantly reduce your long-term interest costs.

When to choose:

If interest rates have fallen significantly since you took out your loan, refinancing allows you to lock in a lower rate. Recasting is ideal if you’re satisfied with your current rate and don’t want to change it.

3. Upfront Costs

• Recasting: Has relatively low fees, usually ranging from $150 to $500, depending on the lender. There are no closing costs, appraisals, or credit checks involved.
• Refinancing: Involves significant upfront costs, typically 2% to 5% of the loan amount. These costs include appraisal fees, credit checks, title insurance, and other closing fees.

When to choose:

If you want to avoid high upfront costs, recasting is much cheaper than refinancing. However, refinancing might be worth the cost if it results in long-term savings through a lower interest rate.

4. Loan Term

• Recasting: Keeps your original loan term. You won’t extend or shorten the duration of your loan; your payments are just recalculated based on the lower principal.
• Refinancing: Allows you to change your loan term. For instance, you can switch from a 30-year mortgage to a 15-year mortgage (or vice versa), which can either shorten the time to pay off your loan or lower your monthly payments.

When to choose:

If you’re looking to shorten your loan term to pay off your mortgage faster, refinancing is the better option. Recasting keeps your loan term the same, making it ideal for those who want to reduce monthly payments without changing the length of their mortgage.

5. Flexibility and Simplicity

• Recasting: Is a simpler process with fewer requirements. There’s no need for a credit check, income verification, or home appraisal. If you have the cash for a lump-sum payment, it’s a quick and easy way to lower your payments.
• Refinancing: Requires a full loan application, including a credit check, income documentation, and usually a home appraisal. The process can take several weeks and involves more paperwork.

When to choose:

If you prefer a quick, straightforward solution, recasting is a better choice. Refinancing is more complex but gives you more flexibility to change your loan terms.

When Should You Recast Your Mortgage?

Recasting is a good choice if:

• You have a large lump-sum payment, such as from a bonus, inheritance, or sale of an asset.
• You want to reduce your monthly payments without changing your interest rate or loan term.
• You don’t want to go through the refinancing process or pay high closing costs.
• You are happy with your current interest rate and loan terms.

When Should You Refinance Your Mortgage?

Refinancing makes sense if:

• Interest rates have dropped significantly since you took out your mortgage, and you want to secure a lower rate.
• You want to adjust your loan term, such as switching from a 30-year to a 15-year mortgage.
• You need to tap into your home’s equity through a cash-out refinance.
• You’re comfortable with the higher upfront costs and more involved process of refinancing.

Conclusion: Which Option Is Right for You?

Choosing between mortgage recasting and refinancing depends on your financial goals. If you’re primarily looking to lower your monthly payments and have a lump sum available, recasting is a simple, low-cost solution that keeps your loan terms intact. On the other hand, if you want to take advantage of lower interest rates or adjust your loan term, refinancing offers more flexibility, though it comes with higher upfront costs and a more complex process.