Are you wondering if a mortgage recast or refinance might be better for lowering your monthly payments? Read on as we compare.
As a homeowner, you’ve spent years building equity in your house, and now it’s time to work towards other financial goals. Whether you’re getting ready for retirement or paying for someone’s education, lowering your monthly mortgage payment can help get you there.
There are several options for lowering your interest payments, including mortgage recasting and refinancing. So, which is better?
It all depends on your available cash flow. While recasting always requires you have funds on hand, you don’t necessarily need to have other assets to refinance.
In this short guide, we’ll explain the difference between recasting and refinancing along with other potential options for lowering your payments so you can enjoy life to the fullest.
Pros and Cons of a Mortgage Loan Recast
Mortgage recasting is the method of paying a lump sum towards your mortgage principal to reduce your monthly payments.
- If you come into an inheritance or have assets to liquidate, you could make a single large payment towards your mortgage. This would reduce the total amount you owe over the remaining mortgage term.
- Because your principal is lower, you’ll also pay less interest per month. Likewise, if you’re currently paying for private mortgage insurance (PMI), you may be able to stop (assuming your payment gives you at least 20% equity in the home).
- Say you have a remaining home loan balance of $350,000 with a 3.5% interest rate. If you put $100k towards your principal balance, your monthly payment could drop from $1,796 to $1,252
There are several benefits to a mortgage loan recast, including:
- Lower monthly payment
- No closing costs
- Staying with your current mortgage lender without shopping for a new mortgage rate
However, there are some potential negatives:
- Not all lenders offer mortgage recasting. In that case, a large sum would help you pay off your mortgage sooner, but it would not reduce your monthly payments.
- Most people don’t have access to a large lump sum that would make a significant difference in their monthly mortgage payment.
Mortgage loan recasting is not always possible. In that case, refinancing is another option.
Pros and Cons of a Mortgage Refinance
Unlike mortgage recasting, which allows you to keep your original loan term or amortization schedule, a mortgage refinance loan is one of the types of refinance options that replaces your existing mortgage with a new agreement.
Why refinance your home loan? The benefits of your new loan terms could include:
- A lower interest rate
- A longer payback period
- The ability to take cash out against your equity
And you don’t absolutely need cash on hand to enjoy these benefits
However, keep in mind the potential downsides of refinancing your existing loan. These include:
- Closing costs – There are always closing costs associated with refinancing. These costs often exceed $6,000. As we noted, you don’t need this cash on hand, since you can often roll your closing costs into your new loan. Just keep in mind that will increase your overall debt load, and you’ll have to pay interest on that amount, too.
- Little savings – If you take out cash, roll in your closing costs or agree to a longer loan term, you might not actually pay much less over the life of your loan.
- Inaccessibility – Refinancing can be a good option for people with a steady income and good credit. But if you attempt a mortgage refinance with bad credit and late payments, refinancing could be costly or even impossible.
Other Options for Lowering Your Monthly Payment
Refinancing and recasting aren’t always the best method for improving your financial health.
Whether you have a low credit score or you’re simply looking for more savings, consider the following options:
- Loan modification – If you’re in danger of foreclosure due to late and missed payments, you can always discuss the situation with your mortgage lender. In some cases, they may be willing to agree to a lower interest rate, longer loan period, or another modification that makes your payments more affordable. To see how this loan option stacks up against refinancing, check out our comparison of a loan modification vs refinance.
- Selling your home – You’ve built home equity, and you can use it to lower your monthly costs by selling and moving to a different property.
- Sale-leaseback – It’s easy to assume that once you’ve sold your home, you have to move. But if you want to stay put, it might be possible to find a sale-leaseback who will let you stay and lease your home, potentially at a lower monthly payment rate. Curious to learn more?
Sale-Leaseback: A Better Way to Improve Your Finances
When it comes to a mortgage refinance vs recast, sometimes the best option is neither. While mortgage recasting can seem attractive, not everyone has cash on hand to lower their costs—and if you do, you might want to buy a vacation home instead. On the flip side, mortgage refinancing can result in some savings, but it can also increase your overall debt.
As a homeowner, your equity gives you other options.
A sale-leaseback program provides a solution that works for your unique goals. It works by you selling your house. You get the cash you need and a lease to stay in your home as a renter until you’re ready to repurchase the house or move out. If you choose to move, the buyer will list the house on the open market. Once it sells, your lease terminates and you receive any appreciation on the sale.
If you’re wondering whether a mortgage recast or refinance might be better for lowering your monthly payments, talk to a financial expert to go over the details of each and your specific situation.
- Forbes. Mortgage recasting. https://www.forbes.com/advisor/mortgages/mortgage-recasting/
- Business Insider. Average mortgage closing costs. https://www.businessinsider.com/personal-finance/average-closing-costs