Refinancing a mortgage only makes sense if you want a lower interest rate or shorter term length. Recasting or prepaying your mortgage probably makes more sense, because you won’t need to pay for an entirely new loan. Check with your lender to see which one is appropriate for your situation, or talk to an experienced real estate agent.
A mortgage recast allows you to pay down the principal of your loan and receive a new monthly payment schedule based on a lower loan balance.
We’ll explain the key differences between recasting and refinancing, and how to tell which is the best option for you, given your financial situation and goals.
When is Recasting a Mortgage a Good Idea?
If you receive an inheritance or a sizable bonus from your job, it might make sense to recast your mortgage in order to reduce your monthly payments and ultimately pay less money in interest.
Recasting a mortgage doesn't change the loan's timeline, it only changes how much you pay each month. Rather than confuse you with the dictionary definition of "amortization schedules," let's walk through an example.
Let's assume you took out a 30-year fixed-rate mortgage for $300,000 with a 4% interest rate. That means you'll probably be paying around $1,450 per month.
You've been killing it at work so they give you a performance bonus worth $50,000. You work as a hedge fund manager so this example isn't totally ridiculous. Also, you're a responsible adult so you decide to invest in yourself — via your home’s equity — by recasting your mortgage.
The bank will likely charge a $300 recasting fee, your monthly payment will fall to about ~$1,200. This is a great idea if you're happy with your current interest rate. That can save you a lot in taxes at the end of the year.
Since now you're only paying a 30-year fixed-rate mortgage worth $250,000 with a 4% interest rate, the total cost of your mortgage is $430,000. That's $85,000 less than before, meaning you'll save at least $35,000 in interest payments.
Why Not Just Refinance?
Most mortgages (other than FHA and VA) have a built-in option allowing you to recast. If you want to refinance, that consists of buying a whole new loan. That includes all of the closing costs, like appraisal fees, origination fees, etc.
If you've recently taken a hit to your credit score, refinancing might not even be an option.
Conversely, if you already qualified for a fixed low-interest rate, why would you want to refinance? The principal aim of a refi is to obtain a lower interest rate. In a market of rising interest rates, it's unlikely that you'll be able to obtain a lower one.
However, refinancing will allow you to change the terms of your loan, and if you're looking to decrease the lifespan of your loan, it might be an option.
Prepaying Your Mortgage
It's also possible to prepay your mortgage, where you pay all or part of the money on your mortgage before it's officially due. This will also allow you to pay a significantly lower interest rate.
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