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Housing costs can put a real strain on a budget. Recent Experian data puts the average mortgage balance at $208,185, with more than 1.3% of mortgage accounts anywhere from 30 to 180 days past due. Homeowners looking to restructure their loan to reduce their monthly payment may do so through a mortgage recast or refinance.
Both mortgage recasting and refinancing can lower your monthly mortgage payment to free up room in your budget and make it easier to avoid missing a payment. We'll unpack the details in just a moment, but here's a quick side-by-side comparison:
|Mortgage Recasting vs. Refinancing|
|Mortgage Recasting||Mortgage Refinancing|
|Fees||Administrative fee that's typically a few hundred dollars||Closing costs that can total 2% to 5% of the loan amount|
|Eligibility||Depends on the mortgage lender, though you cannot recast federally backed mortgages like FHA, USDA and VA loans||Virtually all mortgage types can be refinanced; a minimum credit score of 620 is generally required for a conventional mortgage refinance|
|Will your interest rate change?||No||Borrowers may get a lower rate if current market conditions allow for it; a credit score that has improved since you were initially approved for the loan can also help you secure a better rate|
|Will your loan term change?||No||You may opt for a shorter or longer loan term|
|Is a home appraisal required?||No||Usually|
What Is a Mortgage Recast?
When recasting your mortgage, you'll make a lump-sum payment toward your principal balance. Your lender will then use your new balance to calculate a new, lower monthly payment. Meanwhile, the loan term and interest rate stay the same. Recasting may be a viable option for those who come into a windfall, like a work bonus or inheritance. Just keep in mind that mortgage recasting usually comes with an administrative fee to the tune of several hundred dollars.
Every mortgage lender has its own rules around recasting. To learn what your options are with your specific lender, you'll need to reach out to them and see what they have to say. Most lenders require the borrower to have a positive payment history, and they'll also likely set a minimum lump sum payment amount. This minimum can range anywhere from $5,000 to $50,000. In some cases, the number is expressed as a percentage of your current loan balance.
Mortgage recasting is a fairly simple process that doesn't require a credit check, home appraisal or closing costs. It works like this: Say you have a 30-year conventional mortgage with a 4% interest rate. You owe $275,000 on your loan and your monthly payment (principal plus interest) comes to $1,313. You receive two work bonuses totaling $40,000 and decide to use the cash to recast your mortgage. Your monthly payment after recasting will now go down to $1,122—saving you almost $200 per month.
If your recast payment unlocks enough home equity, it could even eliminate your need for mortgage insurance.
What Is a Mortgage Refinance?
Refinancing your mortgage is when you take out a new home loan and use it to pay off the outstanding balance on your existing mortgage. Refinancing is often done to secure a lower interest rate, which will typically result in a lower monthly payment and less overall cost. Your credit score and current market rates will determine whether you could secure a better rate. Refinancing can also change your loan term depending on the loan you choose. While stretching out your repayment timeline will reduce your monthly payment, it also means paying more interest in the long run.
Unlike recasting, refinancing does not require making a lump-sum payment toward your principal balance. That's a plus for cash-strapped homeowners, but refinancing can be expensive in other ways. A home appraisal is often required. You'll also be on the hook for closing costs, which can be 2% to 5% of the cost of the loan. Some lenders allow you to roll these fees into your mortgage, but others may require you to pay them upfront. Some lenders may waive closing costs altogether.
Before you decide whether to refinance, take a second to run the numbers. Let's continue with the above example: a 30-year conventional mortgage of $275,000 with a 4% interest rate. If you were to refinance to a new loan with an interest rate of 3.15%, your monthly payment would go down by just over $130. Use Experian's mortgage calculator to calculate your potential savings.
Recast or Refinance: Which Is Better?
One option isn't universally better or worse than the other—they're simply two ways to potentially reduce your monthly mortgage payment. The best option for you depends on your unique financial situation. If you're feeling torn, consider these key takeaways:
When Recasting Might Make More Sense
- Your lender allows recasting
- You've got a large amount of cash on hand that meets your lender's eligibility requirements
- You're happy with your interest rate, loan term and lender
- Your savings are in a good place, including your emergency fund and retirement savings, and you're OK with putting a large chunk of cash into your home
- You don't have large amounts of credit card debt to pay off, which might be a better use of your lump-sum payment
- You don't want to get a home appraisal or pay closing costs
- You want to avoid a credit check
When Refinancing May Be Your Best Bet
- Recasting isn't an option with your home loan
- You lack the upfront payment to recast your mortgage
- Your credit score has improved in the time since the loan was originated
- Market rates are low
- You're looking to change your lender, loan term or interest rate
- Paying closing costs is worth it because refinancing will save you money in the long term
The Bottom Line
If refinancing feels like a better fit, your credit score will carry a lot of weight. It's also a key part of financial wellness. Experian makes it easy to stay in the know so you can maintain a strong credit profile. The first step is checking your free credit score and credit report.