Paying off your mortgage is a huge milestone! Whether you aim to pay your mortgage right on time or you plan to pay off your mortgage early, there are different strategies that you can use on your journey. When deciding on a mortgage payoff strategy, that often churns up the great debate of recasting vs. refinancing.
There are benefits to both recasting and refinancing a mortgage. Like all things in personal finance, the best option depends on your personal situation.
To help you get a better handle on recasting vs. refinancing, read on!
What is Recasting?
Mortgage recasting is one strategy that you might use on your mortgage payoff journey.
In a recast, your lender runs your mortgage payment schedule again based on the remaining loan balance and loan term. If you are at all ahead on your mortgage payments, a recast could potentially lower your monthly payment amounts.
So how do you know if a mortgage recast is right for you?
If you have made extra payments or intend to make extra payments, you might consider a recast. A mortgage recast is also a solid option if you intend to make a single lump sum extra payment before you pay off your mortgage.
What is Refinancing?
Refinancing a mortgage is different than recasting it. To refinance a mortgage, you are actually changing the terms of the mortgage. Essentially, you are taking out a new (and hopefully improved!) loan.
During a mortgage refinance, you and your lender use a new mortgage to pay off your existing mortgage. You then take over the new mortgage, making payments as outlined in the new loan.
Unlike recasting your mortgage which does not alter the interest rates, refinancing your mortgage can change one or many terms of the mortgage, including interest rates, payment terms, and length of the loan.
Though there are many reasons why people might refinance, one of the most common ones is to try to take advantage of lower interest rates. So if your initial mortgage had a 4% interest rate and rates drop, you may be able to refinance to 3% or even lower. Of course, this depends on many factors, including the market overall.
To check current rates for a refinance, check out Credible.
Recasting Your Mortgage: Pros and Cons
To settle the recasting vs. refinancing debate, it is important to understand the benefits and drawbacks of a mortgage recast.
One of the biggest benefits of a mortgage recast is the fact you may trim your monthly housing expenses. That means that you can reallocate money in your budget toward investments, vacation sinking funds, or anything else your family values.
For many families, the idea of having more wiggle room in their budget without having to pick up a side hustle or land a raise at work is reason enough to consider a recast.
There are additional benefits to consider as well. When seeking a recast, you don't need to worry about having your home appraised. You also don't need to go through the credit check process again. The recasting process is much more straightforward than refinancing.
However, a mortgage recast might not be for everyone. If you want to modify the actual terms of your loan, you can't do that with a recast.
Other homeowners who might want to pass on a recast are individuals working with lenders who charge for recasting. A recast comes with a one-time flat fee, if the lender charges one at all. Still, some homeowners view the fee as off-putting. In this case, these homeowners might opt instead to continue making their own additional payments.
Additionally, not all loans qualify for a recast. If you have a VA or FHA loan, you can't recast your loan. You also need to make sure you meet the on-time payment requirements that most lenders build in as a recast prerequisite.
Before you decide if recasting your mortgage is right for you, make sure you familiarize yourself with the details of your current loan. You also don't want to miss the full scoop on mortgage recasting here!
Refinancing Your Mortgage: Pros and Cons
Knowing the pros and cons of refinancing your mortgage can help you see where you stand in the recasting vs. refinancing debate.
There are a variety of benefits to refinancing your mortgage from a 30-year term to a 15-year mortgage. Some of the top perks include:
- Shortening the life of your loan
- Reducing monthly payments
- Paying less money toward interest
- Becoming debt-free faster
- Getting better control over your payments
Many times, homeowners find their financial situations changing. Refinancing your mortgage may allow you to make sure your mortgage matches your money circumstances.
For instance, individuals who took out adjustable-rate mortgages might really appreciate the certainty that comes with fixed-rate mortgages. In other instances, homeowners may have appreciated a long-term loan, like a 30-year mortgage, but then they decide they want to become debt-free faster. Refinancing to a 15-year loan might better suit that new focus.
While there are many benefits to refinancing your mortgage, it is important to consider the drawbacks as well. Refinancing costs money, usually 2-5% of the loan. That means it is important to run the numbers to see what, if any, savings you'll net by refinancing.
Other potential drawbacks include reduced equity in your home if you do a cash-out refi and higher monthly payments if you decide to take out a shorter loan.
When considering a refi, you want to look at your specific situation. You can crunch the numbers yourself or do a Google search for a refinancing calculator.
Are you still weighing the benefits of a mortgage refi? Check out our in-depth analysis of when it's the right time to refinance your mortgage…and when it's not!
Recasting vs. Refinancing Frequently Asked Questions
Housing is one of the Big Three when it comes to expenses. That means that very few things in your budget have a bigger impact on your financial picture than your housing costs. It's no wonder that there's such a debate about recasting vs. refinancing.
To help you decide if recasting or refinancing your mortgage might be beneficial, we rounded up answers to some of the most common questions homeowners have.
Is Recasting the Same Thing as Refinancing?
No. Recasting and refinancing are not the same things.
Recasting your mortgage has the potential to decrease your monthly payment amounts. Every other part of your loan remains the same.
On the other hand, refinancing your mortgage can change one or multiple terms of the loan. For example, many people refinance their mortgages in order to obtain a better interest rate. Some people also refinance to change the length of the loan.
Maybe when you took out your mortgage, a 30-year term fit into your financial future best. But maybe after paying it down for several years, you've decided that you want to be mortgage-free faster. Refinancing into a 15-year loan can help you do just that!
Is It Better to Recast or Just Pay Down the Principal?
It depends on how your loan is set up and who your lender is!
Of course, you can continue to pay down the principal (as long as your loan allows it!) and not change a thing. The benefit of doing this is that you can revert back to your regular payments at any given time. There's no stress and no extra thinking. Instead, you just follow the terms of your loan that you're familiar with.
Another consideration to make when it comes to recasting your mortgage is if there is a cost to do so. Depending on the lender, you may be able to recast your loan for free. Other lenders may charge $250 to $500 to do a recast. For our frugal friends who are content to manage their regular payments and add extra payments as they go, a recast fee may not be worth the benefit of a recast.
Remember that a mortgage recast does not change your interest rate or the length of your loan. Recasts also don't impact your home equity.
However, many people are excited by the possibility of a recast. It can free up extra money in your monthly budget. Plus, it's really exciting to see all of your progress pay off when the lender runs your numbers again.
Final Verdict on Recasting vs. Refinancing
When it comes to homeownership, flexibility is key. That goes for the financial aspect as well. Oftentimes, people buy a home in one financial situation and discover that their circumstances and their goals evolve over time. As a result, recasting or refinancing your mortgage might make sense.
Both of these strategies can be helpful ways to become mortgage-free faster.
If refinancing seems like it would benefit your mortgage pay-off journey, find out how Credible can help make the refinancing process simple. And no matter where you are on your debt payoff journey, keep going. We promise that it's worth it.
Where do you fall in the recasting vs. refinancing debate? Do you plan to take advantage of either?
Please let us know in the comments below.