Mortgage Recast vs. Refinance: Which Is Better?

Homeowners burdened by mortgage repayments need to regularly examine finance costs and reconsider their loan options. Mortgage recast and refinance are two alternatives that frequently come under the spotlight. Either option could reduce your debt service costs and monthly repayments. 

With a refinance, you’ll have a new mortgage with new terms and conditions. Refinancing allows you to tap into your home equity to release cash for other projects like home renovation or debt consolidation. A recast costs less but the existing mortgage remains unchanged. So, which is best for you — mortgage recast vs. refinance? 

What is a Mortgage Recast? 

Also known as mortgage re-amortization, you make a lump sum payment with a mortgage recast to reduce the principal amount. The lender then recalculates the monthly payments based on the new reduced balance. The mortgage term and interest rate remain unchanged. However, you’ll pay less interest over the term because of the smaller loan amount. 

Not all loans qualify for recast. Government-backed loans are ineligible, including Federal Housing Administration (FHA), Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) loans.

When Should You Consider Mortgage Recasting?

If you come into money, in the form of an inheritance or sale of another property, you could consider a mortgage recast. 

It's important to consider all the factors before deciding on a recast. While a recast can lower your monthly payments, it won't change your interest rate or loan term. Refinancing might be a better option if you get a significantly lower interest rate.

Some lenders will not consider recasting, and those that do set conditions. There is usually a minimum amount that you must pay to qualify. It may be a percentage of the principal or a set amount. You must continue to make the higher payment until after the lower, re-amortized payments take effect. You will pay a fee for recasting a mortgage. If you reduce the principal, using a lump sum payment without recasting, you will continue to make the same repayments but will pay your mortgage off sooner.

Pros and Cons of Recasting

Recasting offers borrowers several benefits.

• Lower monthly payments: You reduce the balance when you make a lump sum payment. The re-amortized monthly payments will drop.
• Interest savings: The lifetime interest comes down along with the amount owed on the mortgage.
• Same interest rate: A recast allows you to keep your existing interest rate. This is particularly beneficial if you have a good rate when interest rates have been rising.
• Lower fees: It is usually less expensive to recast than to refinance a mortgage. 
• Simpler process: Recasting is simpler than a refinancing agreement. There are no credit checks or appraisals.

Recasting also has several downsides.

• Large upfront payment: You need a significant sum to make a difference in your monthly payments.
• Retain existing interest rate: You keep your existing interest rate. If you’re paying a higher rate, it may be advantageous to negotiate a new rate on a refinanced mortgage. 
• Your loan may not qualify: Some mortgages, like FHA loans, do not qualify for a recast. 

What is a Mortgage Refinance?

Mortgage refinancing is different from recasting a mortgage. When you refinance, you trade in one mortgage agreement for another, ideally with more favorable terms. You’ll apply for a new mortgage with the same or a different lender. 

If the new loan is approved, you’ll pay off the existing mortgage with the new one. You’ll now have a new mortgage with new terms and conditions, so why would you want to refinance a mortgage? Here are some reasons.

• Lower interest rate: If interest rates have dropped or your credit rating improved, you could refinance at a lower rate and save money over the long term. 
• Shorter loan term: If you reduce the term, your monthly payments will increase but you’ll save on interest. 
• Cash refinance: Take a new loan against the equity in your home. You can use the cash to renovate your home, fund an education or anything else.
• Consolidate debt: Gather your high-interest debt into a single loan. Consolidating your debt could reduce your total monthly debt payments. 

When Should You Consider Mortgage Refinancing?

Several factors may suggest that it is time to refinance your mortgage including: 

• Interest rates: This is the biggest factor. If interest rates have declined and are significantly lower than your existing mortgage rate it may be time to renegotiate rates. Ensure that the interest savings offset closing costs before taking the plunge. 
• Equity: You need at least 20% equity in your home to qualify for the most favorable interest rates. The more equity you have, the more leverage you’ll have in negotiations. 
• Credit score: You’ll need a good credit score to qualify for a healthy interest rate. 

Pros and Cons of Refinancing

Refinancing offers lenders several benefits. 

• Lower interest rate: The biggest advantage of refinancing a mortgage is the chance to negotiate a lower interest rate. Even a small interest rate reduction can make a big difference over the mortgage term. Find out how much with an interest calculator. 
• Shorter term: If you can afford to make higher monthly payments, a shorter term will build equity faster and reduce the total interest on the loan. 
• Cash out: Once you have accumulated enough equity, you can renegotiate a bigger loan and take the cash.  
• Consolidate debt: With enough equity, you can consolidate your high-interest loans, like credit card debt, under a single loan. Debt consolidation benefits include lower overall interest, consolidated monthly loan repayments and a reduced total debt commitment each month. 

A mortgage refinance also has some serious downsides.

• Closing costs: Refinancing comes at a cost. Appraisal fees, application fees and origination fees are all upfront costs. 
• Savings are not guaranteed: You may not recover your refinancing costs if you don’t acieve a significantly reduced interest rate. 
• Credit score: A hard credit check may have a temporary negative effect on your credit score

Differences Between Mortgage Recast and Refinance

Mortgage recast and refinance differ in many respects. 

Fees 

You may pay a small recast fee, but there are no other costs. 

You will incur significant costs if you choose to refinance your mortgage. These fees can run into several thousand dollars. Weigh these costs up against the savings you make with the new mortgage. If you plan to sell the house before you have recovered the upfront costs, you should reconsider. 

Eligibility 

Recasting is not an option offered by all lenders. Some loans, like FHA loans, do not qualify for recasting. 

You should qualify for refinancing with a good credit rating and enough home equity. The type of mortgage should not matter. 

Interest Rate Change 

A recast does not change the mortgage interest rate. All it means is that you’re reducing the amount owed by the lump sum payment amount. You will negotiate a new interest rate with the refinance agreement. 

Loan Term Change

The loan term will not change with a recast. Only the payment amounts are affected. With a refinanced mortgage, you’re free to renegotiate the terms of the agreement. 

Compare the Best Mortgage Recast and Refinance Companies from Benzinga’s Top Lenders

You’ll find recommended mortgage recast and refinance companies in the table below. 

Mortgage Recast vs. Refinance? You Decide

Mortgage recasting is a simple process for homeowners looking to invest a lump sum in their home. In reducing the amount owed, you can lower your monthly repayments and save on interest paid over the mortgage term. Refinancing is a more comprehensive financial strategy borrowers use to secure a lower interest rate and loan term flexibility. Refinancing unlocks home equity and can release cash for other projects or debt consolidation.

Frequently Asked Questions