Mortgage Recast vs Refinance

Is it better to refinance or recast or your mortgage? Learn the difference between the two and when to apply one or the other.

mortgage refinancing vs recasting

Mortgage Recasting

What is mortgage recasting and why haven't I heard of it?

 A mortgage recast allows borrowers to adjusting the amortization of their loan in order to lower monthly payments.  If a substantial principal reduction is made, or the borrower has a considerable amount of equity, the mortgage is recalculated based on reduced balance of the loan.

How does a mortgage recast work?

The borrow pays down a certain portion of the loan principal (as a minimum principal reduction payment of $5k-$10k or more, or a principal percentage reduction) to qualify for a recast. The amortization schedule is then recalculated.

The basics of the mortgage, such as the loan type, term, and interest rate, remain the same.

Recasting doesn’t apply to every loan. FHA, USDA and VA loans can’t usually be recast, for instance. Conventional, high-balance and jumbo mortgage loans can often be recast.

There can also be restrictions to recasting, such as set timeframes in the loan where the lender will allow calculation to create a new amortization schedule. There may also be requirements for equity and payment history.

How many times can a mortgage be recast?

The answer to that is usually ‘how many times can you qualify?’

Most mortgage lenders don’t limit recasting if you meet the qualifying criteria and make payments on time.

When is a mortgage recast better than a refinance?

Let’s say you got an incredible 2.65% interest rate on your mortgage in January 2021. In 2024, you came into a sizable chunk of money and want to use it to lower your housing overhead without losing that great 2021 rate by refinancing.

Recasting lowers the monthly payments and saves on interest. Recasting also requires no credit check or appraisal.

Is a mortgage recast cheaper than a refinance?

Yes, lenders typically charge a servicing fee of between $250. and $500. for a mortgage recast, while refinancing involves closing costs.

What are the steps to a mortgage recast?

  1. Contact your mortgage lender to determine recast availability, loan eligibility and qualifying criteria;
  2. Put aside funds for a lump sum payment;
  3. Make a formal, written (or electronic) request to recast your loan;
  4. Gain written approval;
  5. Pay the recasting fee and lump sum payment to the principal of your mortgage balance;
  6. Continue with your normal payment schedule until the lender formally notifies you of your new payment.

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Bullet Points

  • Recasts don’t lower interest rate
  • Almost any mortgage can be refinanced
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Refinancing A Mortgage

What are the goals of refinancing a mortgage?

To pay off your existing mortgage and any other encumbrances and obtain a new one offering terms that better suit your current needs.

Refinancing a mortgage is the preferred method to reduce your mortgage interest rate, change the type of mortgage you have (conventional, jumbo, high balance, etc.), lengthen or shorten the term of your mortgage, to eliminate mortgage insurance, or to change from a fixed-rate to an adjustable, interest-only, or other loan product.

What are the types of mortgage refinances?

Standard

Conventional, FHA or VA. Maximum loan-to-value (LTV) is typically 80-97%, varying according to loan type, amount, and lender.

Cash-Out Refinance

A cash-out refinance is when the new mortgage is greater in value than what you owe on the old loan, allowing you to cash out the difference. A cash-out refi can be used for any purpose such as paying off debt, paying tuition fees, making home improvements, or putting money away for a rainy day.

No-Cost Refinance

As mentioned in the intro, refinancing involves 2-6% closing costs, just like a regular mortgage. However, there is the option of not paying closing costs through what’s known as a no-cost refinance. The way it works is that the lender agrees to waive upfront closing costs in return for your commitment to spread the costs over the life of the loan. This is a great way to obtain the benefits of a refinance without having to pay anything now.

Streamline Refinance

A streamline refinance refers to the refinance of an existing FHA streamline loan (a type of FHA mortgage loan requiring limited borrower credit documentation). A streamline refinance reduces the time and costs to get a refinance. To qualify, your original mortgage must have been an FHA loan, the mortgage must be current (not delinquent), and the refinance must result in a benefit to you (by law, the lender cannot put you in a worse position in regards to the interest rate).

What are the basic steps to refinancing a mortgage?

You’ll need to qualify for the new mortgage by meeting income, asset, credit and other criteria, just as you did when you applied for your existing mortgage. You will also need home equity to qualify for a refinance.

Clarify your goals for refinancing. Is your primary objective to lower monthly payments? Reduce the loan term (from 30 years to 25 or 15)? Eliminate MIP or PMI? Cash out home equity?

Match your needs to the loan type that best addresses them. A rate and term refinance can reduce the interest rate of your mortgage and/or lengthen or shorten its term. A rate conversion refinance :provides the option to change an adjustable-rate or interest-only mortgage to a fixed-rate product, or vice-versa. A cash-out refinance draws from your home’s equity so you can use funds as needed.

When you’ve decided on a program,  research rates, fees, requirements, and the terms of the loan you’re applying for. Be sure to factor in maximum Loan To Value (LTV) ratio, Annual Percentage Rate (APR), and closing costs.

Next, search for a lender. Request a formal Loan Estimate from several mortgage lenders, including your current one, if you wish. Here’s a great guide to shopping for a lender and loan products.

Once you decide on your lender;

  • Make a formal application. Submit documentation as required by the lender;
  • Complete the home appraisal;
  • Review the terms of your approval;
  • Close the refinance. Your previous mortgage loan and any other encumbrances will be paid off and your new loan will take its place.

What are the costs of refinancing a mortgage?

On average, a refinance costs between 2-6% in closing costs. A higher credit score, excellent payment record, and other qualifying criteria such as debt-to-income ratio, improve rates lenders will offer and the chance of your loan being approved.

SOURCE

Forbes

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Investopedia

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Bankrate

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NerdWallet

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Disclaimer

Information provided on this page is posted for educational purposes only. It is not to be construed as legal, tax or financial planning advice. Always consult a mortgage professional when considering a refinance. Citations are not intended as endorsements.

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