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Recasting a Mortgage: Differences versus Refinancing and When It’s Appropriate

Many physicians are interested in lowering their mortgage payments or paying off their mortgages for various reasons, including paying less overall interest over the life of the loan and increasing their monthly cashflow. Mortgage recasting and refinancing are two different options which can be used to do this. As interest rates have gone up, most people that have locked in on low interest rates are hesitant to give them up by refinancing, but may still want or need to lower their mortgage payments.  As such, recasting, an option that many non-government backed mortgage lenders offer to lower monthly mortgage payments, has gotten more popular recently. Unlike refinancing, recasting requires making an additional payment on your mortgage to lower the balance while keeping the same interest rate and mortgage term, while refinancing starts a new mortgage process. Below, we cover what recasting a mortgage entails, the pros and cons, the differences between recasting and refinancing, and in which situations physicians should consider these options.


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Recasting a mortgage versus refinancing a mortgage


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What Doctors Should Know About Recasting a Mortgage



Recasting a mortgage is a way to prepay a lump sum towards your mortgage balance and reduce your monthly payments going forward. While many lenders allow you to pay extra toward your principal balance with your monthly mortgage payments without a prepayment penalty, recasting a mortgage requires a lump-sum payment toward the balance. The benefit though, is that with this lump sum payment, your mortgage lender recalculates your monthly mortgage payments over the remainder of your mortgage term for the new, smaller loan balance. You keep your original mortgage interest rate.


Example: If you are 10 years into a 30-year mortgage and have $200,000 left on your 4% mortgage, you could use a $50,000 lump sum to drop your mortgage balance to $150,000. With recasting, your monthly payment would also drop for the remaining 20 years of your mortgage term, and you would keep your 4% interest rate.


Not all mortgage types offer recasting as a feature. You usually can’t recast FHA loans, VA loans, or USDA loans. You can typically, however, recast conventional loans, physician loans, jumbo loans, and ARMs.



To be able to recast your mortgage, you will need to be current with payments and reduce your mortgage balance by a minimum amount to recast it.

Basic overview of mortgage recasting 101


How Much Do You Need to Pay Toward the Mortgage to Qualify to Recast a Mortgage?



The lump-sum requirement for recasting varies depending on your mortgage lender. Most lenders require a minimum payment of $5,000-$10,000 to qualify for a recast. Other lenders opt for a percentage of the current mortgage balance versus a fixed amount. This percentage is typically around 20%. There is also generally a small fee of a few hundred dollars to recast a mortgage.



Advantages of Recasting a Mortgage



Allows you to keep your interest rate. Many physicians with fixed interest rate mortgages currently have rates in the 2%-4% interest range. In the 6%-8% recent rate world, it’s hard to give up those lower rates. By recasting a mortgage, you can keep all the terms of your original mortgage, including the interest rate.


Gives you extra space in your budget. By using your lump sum to recast a mortgage, you keep the same mortgage term but lower your monthly payment. If you have a tight budget, recasting a mortgage can give you more flexibility with what to do with your monthly cashflow.


Learn more about budgeting for physicians.


Saves you in interest over the life of the loan. Interest is usually calculated and assessed monthly on standard mortgages. By making a lump sum payment, you are reducing the overall amount of your remaining mortgage balance that is assessed interest. The greater the lump sum you have to apply, the more you can save on the total overall cost of your mortgage.



Disadvantages of Recasting a Mortgage



Doesn’t decrease the length of the mortgage term. When recasting a mortgage, your 30-year mortgage remains a 30-year mortgage. Your lump sum does not result in you paying off the mortgage early. The closer you are to wanting to retire, the less recasting a mortgage versus paying down the mortgage likely makes sense.


Has associated fees. While recasting a mortgage may be cheaper than refinancing one, there are still fees associated with this option. Recasting a mortgage typically ranges in the $150-$500 range, which is generally significantly cheaper than refinancing.


Locked in rate for newer mortgages. If you bought your home in recent years, you might be waiting for interest rates to drop to refinance to a lower rate. If so, recasting won’t help. While you’ll still reduce your overall interest paid for your mortgage, your interest rate will remain at the original loan rate, unless you have an adjustable rate mortgage (ARM). While you can also recast an ARM, your terms for interest rate adjustments will remain the same.


Pros and cons of recasting a mortgage


What Doctors Should Know About Refinancing a Mortgage



Refinancing a mortgage is another option available for doctors, though it is a very different process. When you refinance your mortgage, you get an entirely new mortgage, which resets the terms of your original mortgage. Using our same example above, you could refinance your $200,000 mortgage without having a lump sum to pay down the balance. When refinancing, you could choose to shorten your mortgage term to a 15-year term (reducing your remaining 20 years left, but likely increasing your monthly payment) or refinance to a new 30-year mortgage, which could reduce your monthly payment, depending on the interest rate.


When refinancing your mortgage, your new mortgage will reset to current interest rates. If interest rates fall, this can be a great opportunity to save thousands in interest over the life of your mortgage. But if you’re our example physician above with a 4% mortgage, refinancing to a 7% mortgage would likely cost them thousands more instead.


Refinancing a mortgage typically costs more than recasting one. While recasting a mortgage costs a few hundred dollars, refinancing typically costs anywhere between 2%-5% of your new loan balance. In the example we use above, refinancing the new $150,000 mortgage could cost you $3,000 or more.


Learn more about refinancing on our guide to mortgage for doctors.



When Should Physicians Recast a Mortgage Versus Refinance?



Consider refinancing:


While there are a few different reasons doctors consider refinancing, the one that’s generally the better financial reason is to get a lower interest rate. This could be from a conventional or physician loan at a higher interest rate to a conventional or physician loan at a lower interest rate, or from an ARM to a lower fixed-rate conventional or physician loan. This reduces the cost of the mortgage, the total interest paid over the life of the loan, and can reduce their monthly payment as well, depending on how far into their previous mortgage they were and the terms of their refinance (closing costs, new term, etc.).


Consider recasting:


Doctors can consider recasting their mortgage if they receive a large cash gift, an inheritance, or a significant bonus at work and want to lower their monthly payment versus paying off their house early.


Recasting a mortgage can also be an option for physicians who move for a job and purchase their new home before selling their old home. Once they receive the proceeds from the house sale, if it isn’t enough to pay off the entire mortgage, they could use the lump-sum proceeds to recast the mortgage instead.



How to Refinance or Recast a Mortgage



If you are looking to recast a mortgage, reach out to your current mortgage lender to see if they offer this feature.


If you are looking to refinance, our partners at Credible can help.


Credible has partnered with Physician Side Gigs to offer options for primary mortgages and mortgage refinancing. Explore options at through our affiliate link.  NMLS #1681276, in all states except NV, NY, UT,  and WA.

If you are shopping for a new mortgage, explore our partner mortgage lenders for physicians, who’ve helped so many in our communities.



Alternatives to Recasting or Refinancing a Mortgage



Pay off your mortgage early. If you want to skip the fees associated with recasting a mortgage and don’t need a lower monthly payment, you can take the money you would use to recast the mortgage and simply apply that lump sum to your mortgage. This will also save you in total interest over the life of your mortgage. Instead of reducing your monthly mortgage payment, it will shorten the length of your mortgage, allowing you to pay it off early.




Use the money for other financial goals. Recasting a mortgage requires a lump sum of money to lower the monthly payment. Depending on where you are in your financial journey, this may or may not be the best use of these funds. Other potential uses can include establishing an emergency fund or paying off high interest debt.


Ways a physician can use a financial windfall



Selling your house. If you are considering recasting your mortgage to lower your payment in order to make ends meet in your budget, you may be house poor. If you could use the money for more urgent financial goals listed above, you may want to consider assessing if your house is worth the financial strain you feel, even with the reprieve of recasting. This is an extreme decision not to be taken lightly, but is worth considering if you’ve been struggling with your mortgage payment for a while.




Conclusion



Both recasting a mortgage and refinance can be useful options in certain situations, but they aren’t the only available options. Both have their pros and cons for physicians, so explore which works best, including alternatives, based on your specific financial situation and goals.



Additional Mortgage Resources for Doctors



Looking to learn more about mortgages and refinancing. Explore:



You can also watch free replays of past housing and mortgage educational events.


 

Disclosure: This page contains an advertisement from a third-party advertiser, Credible Operations, Inc., which is licensed as a mortgage broker in some, but not all, states (see https://www.credible.com/a/mortgage/licenses). Information contained herein is provided for illustrative purposes only, without any representations or warranty as to its accuracy or applicability to you. All credit requests are subject to review and approval, and your actual loan terms will depend on your financial situation. Credible Operations, Inc. is solely responsible for the content of its advertisement and the services it provides.


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