Mortgage recasting vs. refinancing: What you need to know

Mortgage refinancing involves replacing an existing mortgage with a new one that typically has a lower mortgage rate. With historically low interest rates, many homeowners took advantage of refinancing in 2020 and 2021. In fact, an estimated $772 billion in first liens were refinanced during the fourth quarter 2020, according to Freddie Mac.

If your interest rate is good and your goal is to simply reduce your monthly payment, you have another option: Mortgage recasting. While it’s not as common as refinancing, you can recast a loan with a lump sum payment that reduces your balance. Your terms, such as your interest rate and length, stay the same. What changes are your balance and monthly payment because your lender recalculates your monthly bill based on the smaller loan amount.

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Recasting and refinancing can help homeowners save on interest

Both recasting and refinancing will impact the total interest you pay over the life of your mortgage. How the reduction impacts your budget, however, will vary.

For example, if you have a $300,000 balance on your mortgage and can reduce the principal by $50,000, a recasted loan will be based on a $250,000 amount. With a 3% percent interest rate, a 30-year fixed-rate loan would drop from $1,398 to $1,165, saving you $21,731 in interest over the life of the loan while it lowers your monthly payments. Plus, you'll increase your home's equity. This mortgage recast savings calculator can help you determine how much you can save.

If you refinance a $300,000 mortgage balance with a new loan with a 3% interest, your payment would be $1,265. Depending on the original interest rate of the loan, your savings would vary. For example, if your current loan has a 4% interest rate, your current monthly payment is $1,432. The refinance would save you $167 a month and $60,277 in total interest over the length of the loan.

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Recasting fees are typically lower than refinancing closing costs

When it comes to fees, recasting offers an advantage as it’s less expensive than refinancing. When you refinance your mortgage, you get a brand-new loan—one that comes with closing costs, such as appraisal and origination fees. When you recast a loan, however, you don’t incur these charges. Instead, your lender will likely collect a small recast fee of a few hundred dollars for the service.

Refinancing may help you get a new, lower mortgage rate

As of May 13, 2021, Freddie Mac reports that the average rate for a 30-year mortgage is less than 3% and shorter terms offer rates that are even lower. Borrowers with good credit scores may qualify for the lowest rates. If you financed your home a few years ago, you might qualify for a substantially lower interest rate. In this case, refinancing your loan instead of recasting it may be a better choice because when you recast a loan, your interest rate doesn’t change.

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Refinancing lets you pay off your mortgage faster

Recasting your mortgage maintains your terms, which includes your current loan payment schedule. If you want to pay down your mortgage faster, refinancing may help you achieve this goal. You can refinance a 30-year mortgage into a 15-year loan to speed up the payoff process. And with a lower interest rate, you may free up enough cash in your monthly budget to make extra payments on your loan and pay it off even faster.

Recasting requires a lump sum of money

While recasting your loan doesn’t add closing costs to your balance, you do need access to a lump-sum payment. The minimum amount required to recast your loan can vary by lender, but typically you’ll need to reduce the balance by at least $20,000. This can be a drawback when compared with refinancing because it could eat up your available funds.

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