Mortgage Refinance vs Mortgage Recast vs Second Mortgage

Reading Time: 4 minutes | By: Tori Russell | Published: April 12, 2024

A refinance is the process of replacing your current mortgage loan with a new loan. Depending on the type of refinance you got, your new loan might include lower interest rates, new loan terms, or simply the opportunity to borrow a considerable sum of cash via your home equity.

Whether it’s to lower your monthly and/or lifetime loan payments or to make borrowing money quickly easier, a refinance is a fantastic option available to homeowners looking to exercise their financial freedom in a variety of ways. There are, however, a couple of other methods homeowners can use to achieve some of these goals as well -- namely, mortgage recasts and second mortgages:

Two people discussing housing finance

Mortgage Refi vs Recast

  • Mortgage recast: A mortgage recast is when you make a large, lump-sum payment to your loan’s principal. If you do this, your lender will recalculate your loan based on this lowered principal. This can lead to lower monthly payments. In most cases, your lump sum will need to meet a minimum requirement set by the lender you are working with.

  • As suggested above, a mortgage recast is a good option if you’re happy with your current loan term and rate, and simply want to take advantage of the opportunity to invest a large sum in your home. This is a simple method to lower your monthly payments.

    A refinance, on the other hand, is the better choice if current interest rates are lower than the ones on your old loan, or if you’d also like to change your loan term. This can save you a significant amount over the lifetime of your loan.

    • Recast vs Modification

      Mortgage loan modification: This is an option offered to homeowners struggling to make payments on time with their current loan terms. Your lender might recalculate your loan to change your loan term, interest rate, or principal balance to make it more feasible for you to make your payments on time.

      This option is not available to all homeowners -- it is specifically meant to assist those that are struggling, because the bank does not want their borrowers to default on their payments either. You’ll need to qualify with your lender to utilize this option.

Mortgage Refi vs Second Mortgage

  • Second mortgage: A second mortgage is a second loan that you take out in addition to your current mortgage. With this type of loan, homeowners borrow against the equity they have in their home. The borrowed cash can be distributed all at once or in installments. There are two types of second mortgages:
    • Home equity loan: With this type, you borrow a lump sum and pay it back in monthly installments. Your interest rate will be fixed.
    • Home equity line of credit (HELOC): This type gives you a line of credit, which grants continuous access to borrowable cash with the caveat that you will be subject to variable interest rates. These loans start with a period called the draw period, during which you’ll only pay off your interest. After that period, however, you’ll also need to start paying back what you borrowed.

With a second mortgage, you’re given access to your home equity, meaning you can borrow cash for large expenses such as weddings, debt payments, or home remodels. This is a great way to access your equity if a refinance is off the table -- maybe you like your original mortgage terms and don’t wish to change them by refinancing, or perhaps you need the cash sooner than a refi would allow.

In either case, keep in mind that you’ll still be responsible for your original mortgage payments as well -- for some homeowners, the burden of two separate payments is too much financial risk to take on. Additionally, if current interest rates are lower than what you pay on your mortgage now, a refinance could save you a ton of money over time. While both a refi and a second mortgage come with their own pros and cons, it’s important to keep track of not only your own financial goals, but also how the market looks day to day.

How do You Choose?

Refinance loans, mortgage recasts, and second mortgages all come with their own lists of advantages and disadvantages. Which you should go for will depend on what interest rates look like right now, what interest rate you’re currently paying, and your reasons for wanting to make a change when it comes to your mortgage. If you need to borrow cash, a second mortgage or a cash-out refinance could work. If you want to lower your monthly payments, a loan recast or a refinance are your top options. And if interest rates are lower than what you’re currently paying and you want to save money, a refinance is your best bet.

If you are considering refinancing your mortgage, please look at our ratings and reviews of top lenders. We make lender comparisons simple so you can find the right match for your needs, easily.

See the Best Refinance Options
Please provide a valid zip