If your monthly mortgage payment no longer fits your lifestyle or financial goals, you may be able to change it with mortgage refinancing or recasting. Recasting and refinancing are two ways a borrower can save on mortgage costs — sometimes a jaw-dropping amount. To understand which might be best for you, it helps to understand the difference between them and the pros and cons of each.
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Key Points
• Mortgage recasting involves making a large payment towards the principal and recalculating monthly payments on the remaining balance.
• Refinancing replaces an existing mortgage with a new one, potentially with different terms and rates.
• Recasting keeps the original loan’s term and rate but lowers monthly payments due to the reduced principal.
• Refinancing can lower interest rates and monthly payments, and may allow for cash-out options.
• Both options aim to reduce mortgage costs, but the best choice depends on individual financial situations and goals.
Recasting vs Refinancing
Recasting is the reamortizing of an existing mortgage, meaning the lender will recalculate your monthly payments. Refinancing involves taking out a completely new mortgage with a new rate, and possibly a new term, and paying off your old mortgage in the process.
Note: SoFi does not offer mortgage recasting at this time.
Recasting
If your lender offers mortgage recasting and your loan is eligible, here’s how it works: You make a large lump-sum payment — $10,000 might be required — toward the principal balance of your mortgage loan. The lender recalculates the monthly payments based on the new, lower balance, which shrinks the payments. The lender may charge a few hundred dollars to reamortize the loan.
Mortgage recasting does not change your loan length or interest rate. But because your principal amount is lower, you’ll have lower monthly payments and will pay less interest over the life of the loan.
If you were to put a chunk of money toward your mortgage principal and not recast the loan, your payments would not change, though the extra principal payment would reduce your interest expense over the life of the loan.
Who might opt for mortgage recasting? Someone who has received a windfall and wants to put it toward the mortgage might like this option. Sometimes it’s someone who has bought a new home but hasn’t sold the previous one. Once the old home is sold, the homeowner can use some of the proceeds to recast the new mortgage.
Another fan of recasting might be someone who wants to use the lump sum to pay their loan down to 80% of the home’s value so they can stop paying for private mortgage insurance (PMI).
FHA, VA, and USDA loans are not eligible for mortgage recasting. Some jumbo loans are also excluded. If you want to change the monthly payments on those types of mortgages, you’ll need to refinance your loan.
Refinancing
When you seek refinancing, you’re applying for a brand-new loan with a new rate and terms and possibly from a new lender. Most people’s goal is a lower interest rate, a shorter loan term, or both.
While finding a competitive offer might take some legwork, refinancing could help you save money. A lower interest rate for a home loan of the same length will reduce monthly payments and the total amount of interest paid over the life of the loan.
A homeowner who refinances to a shorter term, say from 30 years to 15, will pay much less total loan interest. Fifteen-year mortgages also often come with a lower interest rate than 30-year home loans.
Equity-rich homeowners who’d like to get their hands on cash may find cash-out refinancing appealing.
Pros and Cons of Recasting
Mortgage recasting lowers your monthly mortgage payments and lets you save on total loan interest while keeping the same interest rate. Since you recast your mortgage with your existing lender, the process is pretty straightforward, and the cost could be as low as $150.
There are some potential drawbacks to mortgage recasting, however. Making a large lump-sum payment means you could be trading liquidity for equity, and creating financial instability if unexpected expenses arise or if the housing market takes a downward turn.
If you have other debts with higher interest rates, you may want to avoid mortgage recasting. It could make more sense to use the money you would put toward the principal to pay down your higher-interest debt first.
“No matter what method works best for you, it’s important to cut spending as much as you can while you’re tackling your debts,” said Kendall Meade, a Certified Financial Planner at SoFi.
Recommended: Cash-Out Refinance vs HELOC
Pros and Cons of Refinancing
If you are eligible to refinance, you won’t need a large cash source in order to lower your mortgage payments. Instead, your main goal is to qualify for a lower interest rate. If you succeed, you will save a lot of money in interest over time.
With a cash-out refi, you can use that money for whatever you need: pay down higher-interest debt, add to the college fund, or remodel your kitchen.
Refinancing involves what looks like a bummer: closing costs, which could range from 2% to 6% of the remaining principal. You’re taking out a new mortgage, after all. Some lenders will let you roll closing costs into your loan.
A lower rate could make it all worthwhile, though. It’s a good idea to calculate the break-even point, when interest savings will exceed closing costs. Everything beyond that break-even point will be savings.
Reducing your loan term with a refi could result in a higher mortgage payment but tremendous interest savings over the life of the new loan.
Refinancing may make sense for homeowners who are planning to stay put for years; those who want to switch their adjustable-rate mortgage to a fixed-rate one; and borrowers with FHA loans who want to shed mortgage insurance premiums (MIP), on a loan they’ve paid down or a home that has appreciated. Most FHA loans carry mortgage insurance for the life of the loan.
No matter the home financing topic, find a lender willing to provide transparent answers to your mortgage questions.
💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.
The Takeaway
A mortgage recast vs. refinance: different animals with similar aims. A recast requires a lump sum but will shrink payments and total loan interest. A mortgage refinance may greatly reduce borrower costs and sometimes free up cash. Which one is right for you will depend on your current loan terms and your available cash, among other factors.
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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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