Mortgage Recast vs Refinance: Compare Benefits and Costs

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A mortgage recast or refinance can be a lifesaver if you're struggling with your mortgage payments, but which one is right for you? A mortgage recast allows you to lower your monthly payments by reducing the principal balance on your loan.

In a mortgage recast, you'll need to have a significant amount of equity in your home, which is typically 10% to 20% of the original purchase price. This means that if you bought your home for $200,000, you'll need to have at least $20,000 to $40,000 in equity.

Refinancing, on the other hand, involves taking out a new loan to replace your existing one, and you can choose a new loan term and interest rate. With refinancing, you can also tap into your home's equity by taking out a cash-out refinance, but this will increase your loan balance.

The benefits of a mortgage recast include lower monthly payments, reduced interest paid over the life of the loan, and the ability to keep your original loan terms.

Here's an interesting read: Choice One Mortgage Rates

When to Consider

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Consider recasting your mortgage if you come into money, such as an inheritance or sale of another property. This can help lower your monthly payments, but keep in mind that a recast won't change your interest rate or loan term.

Some lenders may not consider recasting, and those that do often have conditions, like a minimum amount you must pay to qualify. This amount might be a percentage of the principal or a set amount.

You'll need to continue making the higher payment until after the lower, re-amortized payments take effect. Additionally, you'll pay a fee for recasting a mortgage.

You can consider recasting a mortgage in the following scenarios:

  • Selling a home: If you buy a new home before selling your existing one, you can apply the net proceeds from the sale to your new mortgage for a recast.
  • Retiring: Receiving a lump sum retirement payout can be used to reduce your mortgage payment obligation via a recast.
  • Excess cash: Having an abundance of liquid cash can make a recast a good option for lowering your monthly payments.

Pros and Cons

A mortgage recast can be a great way to lower your monthly payments, but it's not without its drawbacks. You'll need a large upfront payment to make a difference in your payments.

The benefits of recasting include lower monthly payments, interest savings, and the same interest rate, which can be beneficial if you have a good rate. You'll also avoid the hassle of credit checks and appraisals, making the process simpler.

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However, there are some downsides to consider. For one, you'll need to pay a significant amount upfront, which may not be feasible for everyone. Additionally, you'll retain your existing interest rate, which may not be the best option if you're paying a higher rate.

Here are some key differences between mortgage recasting and refinancing:

Ultimately, the decision between recasting and refinancing depends on your individual financial goals and circumstances. If you're looking to lower your monthly payments without changing your interest rate or term length, a recast might be the way to go. But if you're looking to make more significant changes to your mortgage, refinancing might be a better option.

How It Works

To recast your mortgage, you'll need to make a lump-sum payment that your lender will approve. This payment will be used to update your mortgage's amortization schedule, which will then be adjusted to reflect the new balance.

Your lender may charge a recast fee or a servicing fee for this service. This fee is separate from the lump-sum payment you'll make.

The process of recasting your mortgage involves contacting your lender to determine eligibility, completing some paperwork, and making the lump-sum payment.

Eligibility and Requirements

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To qualify for a mortgage recast, you'll need to meet certain requirements. Most mortgage companies require a principal reduction of $10,000 or more.

Typically, this means you'll need to make a lump sum payment of at least $10,000 to recast your mortgage. However, some lenders may require a smaller principal reduction, such as 10% of the loan balance, so it's best to check with your mortgage servicer for details.

You'll also need to have a good credit rating and enough home equity to qualify for refinancing. Additionally, your loan must be current with a 12-month on-time payment history.

Here are the types of loans that are eligible for mortgage recasting:

Keep in mind that government-backed loans, such as FHA, VA, and USDA loans, are not eligible for mortgage recasting.

What Is a Loan?

A loan is a type of debt that allows you to borrow money from a lender, which you then repay with interest.

Loans can be used for various purposes, such as purchasing a home, car, or other big-ticket items.

Recasting a loan means rearranging the loan by reamortizing it with a smaller loan balance spread out over the same time period.

This results in smaller monthly mortgage payments.

Typical Requirements

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To qualify for mortgage recasting, you'll need to meet certain requirements. A principal reduction of $10,000 or more is typically needed, although some lenders may have different requirements.

Most mortgage companies will require a minimum payment of $10,000. However, there are exceptions, and some lenders may only require a $5,000 principal reduction.

The one-time cost of recasting a mortgage should be less than $500, but it can vary depending on the lender. Many servicers only charge $200 to $300.

You'll also need to have a good payment history, with at least 12 months of on-time payments. This is a common requirement for most mortgage companies.

Here are the typical requirements for a mortgage recast:

Fees and Costs

Fees and costs are a crucial part of the mortgage recasting process. You may pay a small recast fee, but it's usually only a few hundred dollars.

Lenders may charge a recast fee or a servicing fee to process your mortgage recasting request. For example, Rocket Mortgage charges a $250 recast fee. This fee is a one-time cost that's worth considering when weighing the benefits of mortgage recasting.

If you choose to refinance your mortgage, you'll incur significant costs that can run into several thousand dollars. These upfront costs may outweigh the savings you make with the new mortgage.

Fees

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You'll likely pay a small recast fee, which can be just a few hundred dollars.

Lenders may charge a recast fee or a servicing fee, which is usually only a few hundred dollars. For example, Rocket Mortgage charges a $250 recast fee.

You should be aware that refinancing your mortgage can result in significant costs, running into several thousand dollars.

These costs need to be weighed against the savings you make with the new mortgage.

Prepayment Penalties

Prepayment penalties are rare in today's post-mortgage-meltdown world, primarily existing with second lien mortgages and small banks.

They're fees assessed by a mortgage holder for being paid off too quickly, and some can be issued even for a partial payment, also known as a principal reduction.

Prepayment penalties are a way for mortgage companies to ensure they're making money from issuing a loan.

You should check with your mortgage servicer before paying down the mortgage to avoid any potential penalties.

Interest Rate and Loan Term

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When you're considering a mortgage recast, it's essential to understand how it affects your interest rate and loan term. A recast does not change the mortgage interest rate, but it does mean you're reducing the amount owed by the lump sum payment amount.

You'll still negotiate a new interest rate with the refinance agreement, but it's not a guarantee of a lower rate. This is where a recast and refinance differ, as a refinance typically involves a new interest rate and loan term.

Interest Rate Change

A recast doesn't change the mortgage interest rate, it simply means you're reducing the amount owed by the lump sum payment amount. You'll still need to negotiate a new interest rate with the refinance agreement.

The interest rate remains the same, unaffected by the recast.

Loan Term Change

The loan term is an important aspect of your mortgage agreement. With a recast, you can adjust your payment amounts without changing the loan term. You're locked into the original loan term, but you can renegotiate the terms of the agreement with a refinanced mortgage.

For more insights, see: Fixed Term Contract Mortgage

Reducing Monthly Payments

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You can reduce your monthly mortgage payments by making a lump sum payment, also known as a mortgage recast. This can save you a significant amount of money every month, as seen in Example 1, where the monthly mortgage payment was reduced by $421.

The key to a successful recast is to pay a large enough lump sum to make a significant impact on your mortgage balance. According to Example 2, the bigger the lump sum you pay, the greater the reduction in your monthly payment. Some lenders may have a required minimum for the lump sum payment, so be sure to check with your lender.

A mortgage recast is not the same as making extra payments or prepayments on your loan, as explained in Example 3. While making extra payments can lower your mortgage principal, it won't decrease your monthly payments until you've paid off the loan. A mortgage recast, on the other hand, will reamortize your loan, reducing your monthly payments.

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Here's a comparison of the benefits of recasting versus making principal payments, as seen in Example 4:

As you can see, recasting is a better option if you want to reduce your monthly payments without paying off the loan faster.

In Example 5, a homeowner named Tommy paid a lump sum of $50,000 to reduce his mortgage balance and lower his monthly payments. This not only reduced his monthly payments but also saved him $172,500 in interest over the life of the loan.

In Example 6, a homeowner paid a lump sum of $100,000 to recast their mortgage, reducing their monthly payments by $421 and saving them $51,777 in interest over 30 years.

By using a mortgage recast, you can free up money in your budget and increase your monthly cash flow, as seen in Example 9. In this example, a homeowner paid a lump sum of $100,000 to recast their mortgage, reducing their monthly payments by $421 and saving them $51,777 in interest over 30 years.

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However, it's essential to consider whether a mortgage recast is the best option for your financial situation, as explained in Example 8. If you have a large sum of money available, you may want to consider alternative uses for that money, such as paying off high-interest debt or investing in stocks or bonds.

A unique perspective: Purchase Money Heloc

Refinancing Options and Lenders

Refinancing your mortgage can be a good option if you're looking to lower your interest rate, shorten your loan term, or tap into your home's equity. You can refinance with a new lender or with the same lender as your original mortgage.

Some popular refinancing lenders include Rocket Mortgage (formerly Quicken Loans), which offers online mortgages, and Angel Oak Mortgage Solutions, which provides flexible mortgage options. CrossCountry Mortgage is another option, particularly for self-employed borrowers.

Refinancing can be a costly process, with closing costs ranging from $300 to $7,000 or more, depending on the lender and the specifics of your loan. However, if you can secure a lower interest rate, refinancing may be worth it in the long run.

Some lenders may be more willing to work with borrowers who have bad credit, but you can expect to pay a higher interest rate.

What Is Refinancing?

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Refinancing is a smart financial move that can save you money and improve your financial situation. You can refinance your mortgage to take advantage of lower interest rates, which can lead to significant savings over the long term.

Refinancing is different from recasting a mortgage, and it's not just a matter of applying for a new loan. You'll need to trade in your existing mortgage agreement for a new one, which can have more favorable terms.

One of the main reasons to refinance is to get a lower interest rate. If interest rates have dropped since you took out your original loan, you could refinance at a lower rate and save money on your monthly payments.

Here are some common reasons to refinance:

  • Lower interest rate: This can save you money on your monthly payments.
  • Shorter loan term: This can increase your monthly payments, but you'll save on interest over time.
  • Cash refinance: You can use the equity in your home to get a new loan and use the cash for whatever you need.
  • Consolidate debt: You can gather your high-interest debt into a single loan with a lower interest rate and lower monthly payments.

Refinance Options

Refinancing your mortgage can be a great way to lower your monthly payments, but it's not the only option. You can also consider recasting your mortgage, which can be a simpler and less expensive process.

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To refinance your mortgage, you'll need to apply for a new loan with the same or a different lender, which can involve a credit check and appraisal. This can be a lengthy and costly process, but it may be worth it if you can secure a lower interest rate.

Refinancing can also give you the opportunity to change the terms of your loan, such as shortening the loan term or converting from an adjustable-rate to a fixed-rate mortgage.

However, refinancing may not be the best option if you have bad credit, as you may be offered a higher interest rate.

Here are some key differences between refinancing and recasting:

Ultimately, the decision to refinance or recast your mortgage will depend on your individual financial situation and goals. It's a good idea to consult with a financial advisor or mortgage professional to determine which option is best for you.

How Refinancing Affects Home Equity

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Refinancing a mortgage can have a significant impact on your home equity. A recast can increase your home equity if you reduce the principal amount, but this depends on the specific terms of your loan.

Refinancing with a higher mortgage amount, on the other hand, can decrease your home equity. This is because you're essentially borrowing more money against your home, which reduces the amount of equity you have.

Here are some key things to keep in mind:

  • A recast should increase your home equity if you reduce the principal amount.
  • Refinancing with a higher mortgage amount can decrease your home equity.

If you're considering refinancing to tap into your home's equity, it's essential to weigh the potential benefits against the potential drawbacks. This will help you make an informed decision about whether refinancing is right for you.

Compare Top Lenders

If you're looking for a lender that offers online mortgages, consider Rocket Mortgage (formerly Quicken Loans). They have a secure website where you can get started.

Rocket Mortgage (formerly Quicken Loans) is best for borrowers who want to refinance or recast their mortgage online. They offer a range of mortgage options, but their online platform is particularly convenient.

Consider reading: Online Refi

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Angel Oak Mortgage Solutions is another option to consider, especially if you're looking for flexible mortgage options. Their website is secure, and you can get started with them online.

Angel Oak Mortgage Solutions is best for borrowers who need more flexibility in their mortgage options, such as those with irregular income or credit history. They have a range of products to choose from.

If you're self-employed, CrossCountry Mortgage might be a good fit. They have experience working with self-employed borrowers and offer a range of mortgage options.

Here are some top lenders to consider:

  • Rocket Mortgage (formerly Quicken Loans)
  • Angel Oak Mortgage Solutions
  • CrossCountry Mortgage

Frequently Asked Questions

What are the disadvantages of recasting a mortgage?

Recasting a mortgage may not be suitable for certain loan types and may not provide access to home equity. Additionally, recasting typically comes with fees and doesn't shorten the loan term.

Is it better to pay down principal or recast?

Paying down your principal balance is more effective in reducing interest over time than recasting your loan, which only lowers your monthly payment. By paying principal, you'll save more money in interest and pay off your loan faster.

What is the average fee to recast a mortgage?

The average fee to recast a mortgage is $375, though it can range from $250 to $500. Some lenders may waive this fee, so it's worth inquiring about their policies.

Colleen Pouros

Senior Copy Editor

Colleen Pouros is a seasoned copy editor with a keen eye for detail and a passion for precision. With a career spanning over two decades, she has honed her skills in refining complex concepts and presenting them in a clear, concise manner. Her expertise spans a wide range of topics, including the intricacies of the banking system and the far-reaching implications of its failures.

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