How does recasting a mortgage differ from refinancing?

There are numerous options in which people save money when they have a mortgage. While some people choose refinancing mortgages, others opt for recasting. Both of these options can give you savings due to low monthly payments as well as reduced interest costs. The two are, however, not the same since each method has its own merits and demerits.

Most people who choose to recast mortgages have no issues with cash flow. Their main aim could be to reduce the interest charges. Prepaying a significant amount of money to change the existing loan is what is called recasting. You can make a huge payment or add some extra money on your mortgage payments. This strategy puts you ahead of the debt repayment schedule.

During recasting, the lender can recalculate the monthly payments you make based on the low loan balance. This allows you to pay a lower monthly fee than what you have you been paying. A small loan balance reduces the interest over time.

Refinancing, on the other hand, occurs when you decide to apply to settle your loan by applying for a new one. The new one replaces the existing mortgage and allows you to work with a new lender. The loan that you get from refinancing is supposed to be smaller than the original amount you borrowed for you to enjoy low monthly payments. You should only refinance if you are confident of getting low-interest rates.

Though both of these techniques can be beneficial, recasting is simpler than refinancing. Recasting programs are simple compared to the process of getting a new loan. When recasting, your lender can charge you a small fee for this service. This is easy to recoup within a few months of a boost in your cash flow.

You may also get approved easily for a recast compared to applying for a new loan. Sometimes, some lenders reject approval for a refinance loan. Recasting is easy since you only request for the re-calculation of your amortization schedule. Unlike in refinancing, the lender may not ask for proof of income or other documents that confirm your assets.

In refinancing the interest rate changes but this is not the case during recasting. The lender only alters the balance of your loan during recasting. Some people confuse recasting with a loan modification, but these two terms are not similar.

Refinancing comes with new features such as low monthly payments and interest rates. A new loan may cost you more than a recast since it comes with closing costs such as origination fees and appraisal fees. Stretching the loan over a long period can also increase the interest you pay at the end of the period. Make use of a loan amortization calculator to check how much interest you may pay in the long run.

Both options may be beneficial, but they are not the best way for you to save money. Get a lump-sum amount to prepay your mortgage as you continue making large payments so that you don’t have to choose these alternatives. This not only saves you interest but it also makes it easy for you pay off the mortgage soon.

Categories: Refinance-Mortgage