When you are in the midst of a mortgage term, but you want to change your payments, you have two options. You can recast or refinance a mortgage. Recasting is not something many borrowers are familiar with because lenders do not advertise it. This method requires very few fees and little verification. Lenders definitely make more money when you refinance, which is why you likely do not hear about it. Understanding the difference between the two terms and how they affect your situation can help you make the right decision.
What is Recasting?
Recasting is another term for re-amortizing a loan. It results in a lower mortgage payment and keeps your interest rate the same. In fact, the only thing that changes with this process is your mortgage payment. In order to recast your mortgage, you must have a lump sum of money to put towards the loan. This is different from paying extra principal, though. Anyone can do that on their own. When you recast your mortgage, you ask the lender to take the remaining outstanding principal and amortize it again. This changes your monthly payment and the amount you are obliged to pay.
Refinancing is Different
Refinancing your mortgage changes your interest rate and possibly your term. You decide the term and wait for the time when rates are as low as you prefer. Refinancing starts your term over again if you keep the same term. In order to refinance, you must qualify for the loan. This usually means providing proof of your income and assets, as well as an appraisal. The lender uses these details to determine if you qualify for a new loan. If you do refinance, you pay off your existing loan and start with a new one, sometimes with a new lender.
Qualifying for a Loan Recasting
Lenders do have some stipulations in order for you to recast your loan. First, you need money to do so. The amount you need depends on the lender. Some require a minimum payment of $5,000 while others require 10% of the outstanding principal balance.
Your eligibility for recasting also depends on your loan type. For example, most conventional loans or loans owned by Fannie Mae or Freddie Mac are eligible. Any government-backed loans, such as FHA and VA loans, however are not eligible. Non-conforming loans, such as Jumbo loans, are considered individually.
While your lender will not pull your credit to determine if you should recast your loan, they will check your housing payment history. You must be current on your payments. If you have late payments in the past, they may affect your ability to recast your loan.
Deciding Between Refinancing and Recasting Your Loan
There are many differences between recasting and refinancing your loan. Just as is the case with a refinance, though, the right decision depends on your circumstances. For example, if you are nearing retirement and want to pay your loan off faster, you might not benefit for a loan recast. Instead, you might benefit more from a refinance into a shorter term. When you recast your loan, you do not decrease the term; you just decrease the payment.
On the other hand, if you want to increase your monthly cash flow, a recast could work well. You do have to spend money to recast your loan, but it is money that directly affects your principal balance. When you refinance, you pay a large sum of money to close the loan. It does not lower your principal. If you pay 5% closing costs on a $200,000 loan, this equals $10,000. If you put that $10,000 towards your principal and then recast it, you have a lower payment and a lower principal balance.
A few circumstances when a recast works better than a refinance is as follows:
- Poor credit – If you know your credit score fell significantly, since you took out your original loan, you may not be able to refinance. Your lender will not pull your credit for the recast, so you are in luck. You can lower your principal and your monthly payment without your credit stopping you.
- Lower home value – Many homes suffered a serious decrease in their value after the housing crisis. Unfortunately, many areas have not quite recovered. If you owe more on your home than the value of it, you will not be able to refinance. The only exception to the rule is if you have a VA or FHA loan and can use the streamline refinance process. Otherwise, you are stuck with your loan. Recasting it can help you save money without worrying about the appraisal and refinancing.
Things to Keep in Mind
Although recasting sounds like the perfect solution, it does have some downsides.
- It costs a lot of money. Sometimes you are better off using your money elsewhere. If you have numerous debts or you have a large purchase coming up, the money might be better used there. Sometimes you can include your closing costs in the loan with a refinance, minimizing the effect on your bank account. The only option when you recast your loan is to put a large sum of money down on it.
- Your term remains the same. Refinancing into a shorter term can help you pay the loan off faster. Your term does not change when you recast the loan. If you want to pay the loan off faster, recasting will not help you reach that goal.
- You pay the same interest rate. Although paying a lump sum towards the loan will decrease your principal and therefore decrease your interest, the rate remains the same.
If you are unsure about the benefits of recasting, consider refinancing or just making extra payments to the loan. You are always free to pay more towards your principal. If you are really proactive, you can make biweekly payments. This means paying half of your full mortgage payment every 2 weeks rather than one payment monthly. At year’s end, you make 13 monthly payments rather than 12. This alone can cut years off your term and thousands of dollars off the interest you pay.
Talk to your lender and really evaluate your situation before deciding between recasting and refinancing. Don’t let the excitement of a lower payment force you to make a rash decision.