Mortgage Recast vs. Refinance: Which is Better?

Homeowners can restructure their loan and reduce their monthly payment with either a mortgage recast or refinance.

What Is A Mortgage Recast?
When recasting your mortgage, you’ll make a lump-sum payment to reduce your principal balance. The lower loan balance will generate a lower monthly payment while the loan term and interest rate stay the same.

Recasting can be a viable option for those who come into a windfall, like a work bonus or inheritance.

Every mortgage lender has its own rules around recasting. Lenders may require the borrower to have a positive payment history, and may have a minimum lump sum payment amount.

Mortgage recasting is a fairly simple process that doesn’t require a credit check or home appraisal, and the average cost can be $200-$500.

Here’s an example: For a $275,000 conventional 30 year mortgage with a 4% interest rate, the monthly payment (principal plus interest) is $1,313. A recast with a $40,000 principal reduction will reduce the payment to $1,122.

If your recast unlocks enough home equity, it could even eliminate your need for mortgage insurance.

What Is A Mortgage Refinance?
Refinancing your mortgage involves acquiring a new loan to pay off the outstanding balance on your existing mortgage. Refinancing is often done to secure a lower interest rate and monthly payment.

Keep in mind that extending the repayment timeline will reduce your monthly payment but increase the amount of interest paid over time.

Unlike recasting, refinancing does not require making a lump-sum payment toward your principal balance but there are costs involved. A home appraisal is often required, and closing costs can be 2%-5% of the loan amount. These fees may be absorbed into the new loan, paid upfront, or waived by the lender.

Deciding which of these two options is the better for you depends on your unique financial situation and how long you plan to stay in your present home.

When Recasting Might Make More Sense
• You’ve got a large amount of cash on hand that meets your lender’s eligibility requirements.
• You are satisfied with the current interest rate, loan term and lender.
• Your savings, emergency funds and retirement accounts are adequate.
• Your credit card debt is minimal. Otherwise, the cash might be better used to payoff that debt.
• You want to avoid a home appraisal, significant closing costs or a credit check.

When Refinancing May Be Your Best Bet
• Recasting is not an option with your mortgage loan.
• You lack the cash to make an upfront payment.
• Your credit score is not a concern.
• Market rates are favorable.
• Paying closing costs is worth it because refinancing will save you money in the long term.
• You want to change from an adjustable rate to a fixed rate mortgage.
• You want to replace an FHA loan with a conventional loan to eliminate mortgage insurance.
• With sufficient home equity you could access cash for other needs, such as, college funds and home remodel projects.

Give me a call to help you find a lender to provide answers to
your mortgage questions!

Source: www.sofi.com, www.realtor.com