Borrowers change their mortgage amount to pay the loan faster and at a cheaper rate. The best method to change your mortgage amount is to refinance your loan. You use refinancing when you want to pay a lower interest rate.
For instance, your loan tenure is 30 years, but if you wish to pay off your loan in 15 years, you can apply for refinancing the loan.
Another method that is becoming popular is mortgage recast. This method helps a borrower pay a lump-sum amount to the bank, eventually making fewer monthly payments.
Refinance and recast have rules and processes that a borrower must follow.
The Difference Between Refinancing and Recast
There is a key difference between refinancing and recasting a loan. Let’s take a look at both.
Borrowers choose to refinance to lower the interest rate they are currently paying. Alongside saving you money, refinancing reduces the tenure of the loan and increases the probability of building a home’s equity.
There are four primary reasons why borrowers refinance the loans:
- Lower the interest rate
- Reduce the tenure of the loan
- Consolidate the debt, which has a high-interest rate
- Use home equity in case of need and emergency
- Switch from modifiable risk mortgage (ARM) to fixed rate (ARM is a floating interest rate)
Though many people consider refinancing over recasting, the former also has some loopholes.
Refinancing creates a debt cycle. A long-term refinance makes one pay interest rates for a longer duration. This is the reason why most consider refinancing a waste of money.
Hence, refinancing is a common way to make changes in your mortgage amount. It increases the cost of payment if seen from a long-term view.
Before refinancing, make sure you clear your previous loan balance.
Mortgage recasting is a method to reduce the monthly payment by paying a lump-sum amount. In a recasting, the interest rate does not decrease but the amount to be paid decreases. It is considered a cheaper way to reduce the mortgage amount.
While refinancing costs 2% to 3% of the loan amount, recasting does not cost anything. The lender may ask you to pay some fees to start recasting. Some reasons why you should choose refinancing over recasting:
- Lowers monthly payment
- You do not require appraisal or credit check to recast
- No closing cost
Borrowers do not choose to recast because the monthly interest rate remains unchanged. Also, we cannot alter the Veterans Affairs and Federal Housing Administration loans.
How To Approach the Bank for Refinancing and Recasting?
One must file a new application to the lender or bank to refinance a loan. The lender will then assess your credit score and all the essential documents, as done during the first mortgage.
Mortgage recasting is a bit of a complex process as not many lenders offer recast, and those who do, have specific rules and restrictions to approve a recast. You can talk to your lender and figure out if you are eligible for a loan recast or not.
To Sum it Up
Whether recasting or refinancing, it is essential to calculate the initial cost of both. It also depends on your situation. For education and property loans, it is refinancing works. Recast is a better option if it’s the only loan and you do not wish to revive it.
You can use an online mortgage calculator to calculate the cost. Spending money on luxury items can prove to be a bad idea to refinance. Moves like converting from ARM to a fixed rate are risky steps. Hence, consulting a financial educator or a counselor before deciding will help.