Mortgage Recast Versus Refinancing: Which Works For You?

Using extra funds on your mortgage can reduce your principal or monthly payment, which is especially useful for cash-flow issues. Two methods to lower monthly payments are recasting and refinancing. Mortgage recasting involves a lump-sum payment to lower your principal, resulting in a new, lower monthly payment with the same interest rate. Refinancing, however, means taking out a new loan to pay off the old one, typically to get a better interest rate and potentially a lower monthly payment. Recasting incurs a small administrative fee, while refinancing involves closing costs totaling two to five percent of the loan amount. Conventional loans are eligible for recasting, but government-backed loans are not. Both conventional and government-backed mortgages can be refinanced. Refinancing allows for changes to loan terms, like shortening the repayment period or switching from an adjustable to a fixed rate. Recasting is often used when receiving a large sum of money, like an inheritance or bonus. A recast does not require a new credit check or appraisal, and it preserves your existing interest rate. However, recasting ties up your equity, and the loan term is not shortened. Refinancing is a new loan, restarting the repayment clock and potentially leading to higher overall interest costs. Refinancing may be the only option for government-backed loans, and it allows for changing lenders.