If you want to restructure your loan, you have a few options. You can recast, refinance, or just pay down your loan. Two of these options, the mortgage recast and refinance, require the help of a lender. The third option – paying down your loan, can be done on your own.
We explore all three options for you below.
What is a Mortgage Recast?
You may have never heard of the mortgage recast. That’s because most people refinance; it’s all they know. The recast, however, may save you more interest in the long run and cost you less in closing costs. It’s not the right choice for everyone though, as it requires a lump sum of cash to make it work.
When you recast your mortgage, you significantly pay down the principal balance. You can do this with one lump sum or over a longer period of time with extra payments. Once you have the principal paid down quite a bit, you can ask your mortgage lender to ‘recast’ your loan. Another way to think about it is to ‘re-amortize’ your loan. In other words, the lender will take the new balance and determine appropriate payments given the interest rate you already had as well as the remaining term on the loan.
The benefit of this option is the lower amount of interest you’ll pay. Because your new loan balance is lower than the original principal balance, the interest you pay each month will be lower as will the total interest paid. Because the payment is lower, you will also save money each month/year.
What is a Mortgage Refinance?
You probably know what a mortgage refinance is, but we’ll cover the basics here. When you refinance you take out a completely different loan. It doesn’t even have to be with the same lender. You are free to get the loan from any lender that will approve you.
When you refinance you pay off the original loan and take out a new loan. This new loan will have its own interest rate and term. You may start your term all over again or opt for a shorter term to keep yourself on track in your quest to become mortgage free.
If you refinance to save money, hopefully, you secure a lower interest rate and better term. Keep in mind, if you go from a 30-year term to a lower term, say 15-year term, your payments may be higher. This is because you’ll pay a greater amount of principal each month. Look closely at the amount of interest you pay per month to see if it’s truly a savings. The interest is where the loan usually ends up costing you more.
What Should you Choose?
Deciding whether a mortgage recast or refinance is a better option is a personal decision. Consider the following factors:
- Do you have the money to significantly pay down your loan balance? Each lender has a different requirement regarding how much you must pay down before you can request a mortgage recast. Keep in mind, you can make a lump sum payment or make extra payments along the way to bring the balance down.
- Do you have the money to pay closing costs if you refinance? A recast costs very little; the lender may charge a small fee to do it, but nothing compared to taking out a new loan. Closing costs on a refinance could cost you as much as 5% of the loan amount.
- Do you want to start your term over again? If you refinance, you will take on a new term, starting from square one. If you refinance into a shorter term, you don’t have to worry about starting from scratch, though. If you recast the mortgage, you also don’t reset the term; you just change your payment.
Answering these questions will help you decide which option works best for you. Ideally, if your goal is to decrease the amount of interest you pay, a mortgage recast would work best. If you don’t have the funds to pay the balance down enough, though, refinancing can work. You just have to find the program that will lower your interest enough that makes paying the closing costs and staring a new term worth it.