Mortgage Recast vs. Refinance: Which Is Better?

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A mortgage recast is the better option for reducing your overall monthly payments without changing your loan while a refinance is the better option for those looking to reduce their interest rate or loan term. 

Homeowners burdened by monthly mortgage payments often discuss the mortgage recast vs. refinance debate. Either option could reduce your debt service costs and principal balance, but it’s important to consider the pros and cons of each before making a decision. 

With a mortgage refinance, you’ll have a new mortgage with new terms and conditions. Refinancing allows you to tap into your home equity to release cash for other projects like home renovation or debt consolidation. A recast costs less, but the existing mortgage remains unchanged. So, which is best for you – mortgage recast or a refinance? 

Continue reading to find out. 

What is a Mortgage Recast?

Also known as mortgage re-amortization, a mortgage recast involves making a lump sum payment to reduce the principal amount. The lender then recalculates the monthly payments based on the reduced balance. The mortgage term and interest rate remain unchanged, though you’ll pay less interest over the term because of the smaller loan amount. 

Not all loans qualify for a recast. Government-backed loans are ineligible, including Federal Housing Administration (FHA), Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) loans.

Pros

• Lower monthly payments: You reduce the balance when you make a lump sum payment. The re-amortized monthly payments will drop.
• Interest savings: The lifetime interest comes down along with the amount owed on the mortgage.
• Same interest rate: A recast allows you to keep your existing interest rate. This is particularly beneficial if you have a good rate when interest rates have been rising.
• Lower fees: It’s usually less expensive to recast than to refinance a mortgage. 
• Simpler process: Recasting is simpler than a refinancing agreement. There are no credit checks or appraisals.

Cons

• Large upfront payment: You need a significant sum to make a difference in your monthly payments.
• Retain existing interest rate: If you’re paying a higher rate, it may be advantageous to negotiate a new rate on a refinanced mortgage. 
• Your loan may not qualify: Some mortgages, like FHA loans, do not qualify for a mortgage recast. 

Who is Mortgage Recasting Best For?

“[A mortgage recast] is ideal for borrowers with extra cash and who must lower payments without changing the loan terms,” says William London, a real estate lawyer with Kimura London & White LLP.

It's important to consider all the factors before deciding on a recast. While a recast can lower your monthly payments, it won't change your interest rate or loan term. Refinancing might be better if you get a significantly lower interest rate.

Some lenders and those that do set conditions won’t let you recast your mortgage. You’ll also have to pay a fee for recasting a mortgage. If you reduce the principal with a lump sum payment without recasting, you’ll continue making the same payments but will pay your mortgage off sooner.

What is a Mortgage Refinance?

Refinancing a home mortgage involves trading your home loan for another one, ideally with a lower interest rate or a shorter term. You’ll apply for a new mortgage with the same or a different lender. 

If the new loan is approved, you’ll pay off the existing mortgage with the new one. You’ll now have a new mortgage with new terms and conditions. If you want to access some cash and have enough equity built into your house, you can get a cash-out refinance. This loan type replaces your mortgage with a larger one and gives you the difference in cash. 

Pros

• Lower interest rate: The biggest advantage of refinancing a mortgage is the chance to negotiate a lower interest rate. Even a small interest rate reduction can significantly affect the mortgage term. Find out how much with an interest calculator. 
• Shorter term: If you can afford to make higher monthly payments, a shorter term will build equity faster and reduce the total interest on the loan. 
• Cash-out: Once you have accumulated enough equity, you can renegotiate a bigger loan and get the difference between the two loans in cash. 
• Consolidate debt: Gather your high-interest debt into a single loan. Consolidating your debt could reduce your total monthly debt payments. 

Cons

• Closing costs: Refinancing comes at a cost. Appraisal fees, application fees and origination fees are all upfront costs. 
• Savings are not guaranteed: You may not recover your refinancing costs if you don’t achieve a significantly reduced interest rate. 

Who is Mortgage Refinancing Best For?

Two types of people can benefit from refinancing their mortgage: People who want to change their loan terms and those who want to tap into their home’s equity. 

The first is what’s known as a rate-and-term refinance, which simply means you’re adjusting the loan term or the interest rate. This can be done if you want to extend or shorten your mortgage term or if interest rates have significantly dropped since you purchased your home. 

The second can be done through a home equity loan or a cash-out refinance. With both, you’ll replace your mortgage with a new, larger one and get the difference in cash to pay for renovations or other expenses. 

Mortgage Recast vs Refinance 

How to Choose Between a Mortgage Recast and Refinance

Ultimately, deciding between a mortgage recast and a refinance comes down to your financial goals. “Choose a recast if you want to lower payments but keep your current loan,” London says. “Choose a refinance if you need better loan terms, lower rates or access to home equity.” 

Here are some other factors to consider when debating between a recast or mortgage refinance. 

Fees 

You may pay a small recast fee, but there are no other costs. 

You will incur significant costs if you choose to refinance your mortgage. These fees can run into several thousand dollars. Weigh these costs up against the savings you make with the new mortgage. If you plan to sell the house before you have recovered the upfront costs, you should reconsider. 

Eligibility 

Recasting is not an option offered by all lenders. Some loans, like FHA loans, do not qualify for recasting. 

You should qualify for refinancing with a good credit rating, most lenders require a minimum score of 620, and enough home equity. 

Interest Rate Change 

A recast does not change the mortgage interest rate. All it means is that you’re reducing the amount owed by the lump sum payment amount. You will negotiate a new interest rate with the refinance agreement. 

Loan Term Change

The loan term will not change with a recast. Only the payment amounts are affected. With a refinanced mortgage, you’re free to renegotiate the terms of the agreement.

Why You Should Trust Us

Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his New York City economy coverage. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.

For this story, we worked with William London, a founding partner at Kimura London & White LLP. London specializes in real estate, trusts & estates law, family law and mediation services.

Frequently Asked Questions 

Sources 

• William London, founding partner at Kimura London & White LLP