Mortgage Refinance versus Recast. Which is better?
There are many options if you are looking to save money on your monthly mortgage payments. Recasting and Refinancing are two options that will bring savings on your mortgage, including lower interest rates and lower monthly payments. Both options work differently and have their own benefits and drawbacks. Let us understand what each term means first.
Recasting is also known as Re-amortizing and happens when you make changes to your existing home loan after making a large lump-sum payment of $5000 or more towards the unpaid principal balance of the loan, or you may have already added extra payments to your monthly mortgage payments over the years, reducing the outstanding principal on the loan. In recasting, the interest rate and loan term remains unchanged. The lender recalculates the monthly payments based on the lower principal balance and thus the monthly payments become lower. Since the principal balance is lower, you pay less interest over the remainder of the term.
In a refinance, you replace your existing home loan with a new loan, probably with a lower interest rate. The new loan pays off the old loan and you start making monthly payments on the new loan. Since, the interest rate is low and your principal is lower than you originally borrowed, you will be paying a lower monthly payment.
Benefits and Drawback of Recasting
A recast cannot be done in the first 90 days of the loan. It us much easier to qualify for a recast than an refinance.
- Loan recasts don't require an apprasial and also don't required credit checks.
- Helps with cash flow by lowering monthly payments
- Interest rate on your loan does not change
- Recasts can be as low as $250 through a lender
- Recasting cannot be done in the first 90 days of the loan
- Lenders may charge a small fee to do the recasting
- Recasts are not allowed on government programs like FHA and VA loans
- Recasting of jumbo loans is not available from all lenders
Benefits and Drawback of Refinancing
In refinancing you re-start the clock on your loan
- Refinancing allows you change the features on your loan
- You get to choose whether you want a 30-year or 15-year loan
- You might be able to get a better interest rate and choose if you want a fixed rate loan or an adjustable rate mortgage (ARM)
- You may also be able to add a qualifying co-borrower on the loan
- Refinancing could also secure you a lower monthly payment
- You may have to pay closing costs, including origination, appraisal and other fees
- With most loans, you pay more interest in the early years and pay most of the principal in the later years. If you already been on the old loan for a few years, and you refinance your loan to another 30-year loan, your putting back some high-interest years back into the loan. So, it is possible that you may pay more interest cumulatively.
The trick to saving money is to not doing either recasting or refinancing. You should pay extra either when you get a lump-sum amount like a bonus or periodically pay more than the monthly payments to reduce the outstanding principal. This way you will save money on interest and also pay off your debt early.