Mortgage recast vs refinance
A recast keeps the note, the rate, and the years left, and lowers the payment after a lump sum. A refinance replaces the loan. The payment can fall for a reason that raises the interest you still owe.
Both moves are ways a payment gets smaller after you already have a mortgage. They are not the same contract. A recast, in Fannie Mae’s servicing guide, is a re-amortization after a substantial principal curtailment: the servicer may reduce the principal-and-interest payment based on the current unpaid balance, the current interest rate, and the remaining term. A refinance pays off that loan with a new one. The new loan can have a different rate, a different term, and its own closing costs. The recast calculator and the refinance calculator run those two pieces of math. Neither one knows whether your servicer or a new lender will agree.
What a recast changes
Fannie Mae’s servicing guide, section C-1.2-01, says the servicer must accept and apply an additional principal payment, called a principal curtailment, on a current loan when the borrower identifies it as one. Applying the curtailment is not the same as recasting. The balance falls either way. The contractual payment stays the same unless the servicer re-amortizes. Section F-1-09 says that after a substantial curtailment, the servicer may agree to reduce the principal-and-interest payment only, by re-amortizing the current balance at the current rate over the remaining term, for a current portfolio loan or a current first-lien loan in an MBS pool. The borrower requests it. The guide requires Form 181, the Agreement for Modification, Re-amortization, or Extension of a Mortgage, and it says a re-amortization is not counted as a modification when a later modification is considered.
“May” is the servicer’s. The guide does not set a dollar minimum that counts as substantial, and it does not set a fee. Servicers charge a processing fee or charge nothing. The calculator takes the fee you type. A loan the guide does not cover, including many loans Fannie Mae does not own or securitize, follows that servicer’s own policy. Some notes do not allow a recast at all.
Because the rate and the remaining term stay, the interest left on the loan falls for one reason: the balance is smaller. You can get that interest reduction without a recast, by sending the same lump sum and keeping the old payment. The loan then ends earlier instead of the payment dropping. The calculator shows both. The recast trades a shorter payoff for a lower required payment. The curtailment alone keeps the required payment and shortens the loan. The fee, if there is one, is the cost of the payment change, not the cost of the extra principal. Extra principal reduces interest whether or not anyone re-amortizes.
What a refinance replaces
A refinance is a new loan. The Consumer Financial Protection Bureau describes the costs of taking one out: lender charges, third-party charges, government fees, and prepaids. There is no separate “refinance” price list. A loan advertised as having no closing costs still has costs. The CFPB says a lender covers them in one of two ways: a higher interest rate with a credit, or by adding the costs to the loan amount. A higher rate costs more over time. A higher balance raises the payment and reduces equity. The calculator’s “cash” choice pays the costs at closing. The “roll” choice adds them to the new balance.
The new rate and the new term are independent. A lower rate on a longer term can cut the payment while increasing the interest left to pay, because the clock starts over. A lower rate on the same remaining term is a different comparison: the payment drop is the rate, and the break-even is how many months of that drop it takes to cover the costs. The calculator’s full break-even also watches the two balances. Being “ahead” means the payments you have avoided, minus what you have paid on the new loan, minus cash at closing, plus the difference in the balances, has reached zero. A simple break-even that divides costs by the payment drop ignores the balance and will not match that month.
Worked example
The balance is $280,000. The current note rate is 6.5 percent with 26 years left. The rate is an input, not a quote. The recast sends $40,000 to principal and types a $250 fee. The refinance types a new rate of 6 percent, closing costs of $5,500 paid in cash, and two possible terms: 30 years, and the same 26 years that are left now.
- Leave the loan alone. Principal and interest are $1,861.77 a month. Interest still to pay over the 26 years is $300,872.01.
- Recast after the $40,000 curtailment. The new balance is $240,000. The re-amortized payment, same rate and same 26 years, is $1,595.80, which is $265.97 lower. Interest still to pay is $257,891.95, so the interest reduction against doing nothing is $42,980.06. The $250 fee is covered by the payment drop in 1 month.
- Send the same $40,000 and do not recast. The required payment stays $1,861.77. The loan is paid off in 18 years 6 months instead of 26 years, 7 years 6 months sooner. Interest still to pay is $172,946.94, a reduction of $127,925.07 against doing nothing. That interest reduction is larger than the recast’s, because the extra principal keeps working inside the old, higher payment.
- Refinance to 6 percent for 30 years, costs paid in cash. The new payment is $1,678.74, $183.03 below the current payment. The simple break-even, costs divided by that drop, is 2 years 7 months. The balance-aware break-even is 4 years 6 months. Interest on the new loan is $324,347.80, against $300,872.01 still due on the current loan. Over the full life of each schedule, counting the cash costs on the new loan, the difference is −$28,975.79 in favor of keeping the current loan.
- Refinance to 6 percent but keep 26 years. The new payment is $1,774.30. The simple break-even is 5 years 3 months. Interest on this new loan is $273,578.23. The lifetime difference, same definition, is $21,793.78 in favor of the refinance.
The 30-year refinance can show a lower payment than the recast and still leave more interest on the table, because the term grew. The same-term refinance isolates the rate. The recast isolates the balance. Reading only the new payment mixes all three.
What neither calculator can see
A servicer can decline a recast, require the loan to be current, or set a minimum curtailment the guide does not print. A new lender can decline a refinance. Mortgage insurance, escrow, and a prepayment penalty sit outside both examples. Rolling closing costs into the new loan changes the balance and the payment; the example paid them in cash so the new principal equals the old balance. The loan comparison calculator is for two new offers side by side. It is not a recast.
Fannie Mae’s “may” is not a right to a recast on every loan, and a re-amortization form is not a new note with a new rate. If the goal is a different rate, the recast does not do it. If the goal is a lower required payment after a lump sum, and the rate is staying, the refinance’s closing costs are buying something the recast is not selling.