When it comes to restructuring a mortgage loan, borrowers have 2 (non-modification/delinquency related) options - a refinance or a recast.

We often get calls about mortgage refinancing from people who want to pay down their loan balance to get a lower monthly payment. In many cases, these inquiries are better served by a mortgage recast. Most people either don't know a recast option exists, or they misunderstand how a mortgage recast works.

What is a mortgage recast?

A mortgage recast is a restructuring of an existing mortgage loan, usually as a result of a large, lump sum, payment that is made toward the principal balance of a mortgage loan. The result of a loan recast is a reduced mortgage payment based on the updated principal balance. There are no other changes to the loan - so if there were 200 payments remaining, there will still be 200 payments remaining, but the payments are now based on the reduced principal balance.

Mortgage recasts are often a good idea if a mortgage has a rate lower than current market rates, or a substantial portion of the loan's amortization has passed. Since long term mortgage loans are interest-heavy at the start of the loan, borrowers may not want to re-start a term with a new loan that would reset the clock and reduce the amount of each payment being applied to the principal balance. With a recast, the term of the loan and the loan's rate remain the same while the loan payment and amount owed are reduced.

To accomplish a mortgage recast, a borrower needs to speak with their current loan servicer (the company they make their payments to). Most loan servicers offer a recast option, but how it's done and the requirements may vary from servicer to servicer. For example, some servicers will only allow a recast one time during the life of the loan. Another may have a $10,000 minimum balance reduction to process a mortgage recast. By calling your loan servicer you'll be able to get their specific recast requirements. There are also often small fees associated with processing a mortgage recast, so borrowers should be prepared to give up a small portion of equity to shrink their loan with a mortgage recast. The amount paid for a recast is often substantially lower than a refinance.

When Does a Refinance Make Sense?

While a mortgage recast can help borrowers shrink their payment and keep their loan term in place, a mortgage refinance can help accomplish a different set of goals.

First, let's note the downside of a refinance: the cost. Refinances include closing costs, paid either through fees (often absorbed into the new loan balance) or through interest rate (when you hear "no closing costs" you can rest assured you're getting a higher rate than could/would otherwise be offered).

A refinance is replacing an existing mortgage loan with a new one, often with different terms. If your goal as a homeowner is to withdraw a portion of your home equity as cash, that can only be accomplished with a refinance (or a similar HELOC/HELOAN product). A refinance could also make sense if current market rates are lower than the rate you're paying on your existing mortgage (it's important, though, to consider how much you've paid off on the existing loan, because a lower rate doesn't necessarily mean a better loan) if the savings from the lower rate would be beneficial or you're looking to withdraw cash.

One of the reasons refinance payments look so appealing is because with a new loan, the loan term resets. Where a mortgage recast bases your new payments on the same payment schedule (for example, if you have 200 payments remaining on a loan that originally had 360 payments - a 30 year loan - the recast loan would still have 200 payments remaining), a refinance resets the mortgage term - so your new loan would reset to whatever the term is of the new loan. Stretching out payments over 30 years has 2 results - keeping payments low, but also once again front-loading interest to the beginning of the new loan.

While there are numerous times a refinance makes sense, this article was to primarily discuss the differences of a recast and a refinance, so we won't get into all of them here. When considering restructuring a mortgage with either a recast or a refinance, it's very important to work with an expert you can trust, because every product comes with a list of pros and cons. Interest rate and loan fees are often trumped by how expensive bad advice can be. Working with our team ensures you always have the right loan for your situation, and you'll always get advice geared toward helping you achieve your specific goals.