Mortgage Recast vs. HELOC or Home Equity Loan

Key takeaways

A recast lowers your payment by putting cash in. A HELOC or home equity loan adds new debt by taking cash out.
A HELOC can be a backstop after recasting, but it can be frozen or denied when you need it, so keep an emergency fund too.
Borrowing on a HELOC to fund a recast usually costs more than it saves.

A recast and a home equity line of credit (HELOC) move money in opposite directions. A recast puts cash into your house to lower your payment. A HELOC or home equity loan takes cash out of your house as a new debt. They come up together because people ask two questions: "If I recast and later need the money, can I just borrow it back?" and "Can a HELOC help me buy before I sell, then recast?"

How they compare

	Recast	HELOC	Home equity loan
Direction	You pay a lump sum in	You borrow as needed, up to a limit	You borrow a lump sum
Effect on payments	Lowers your mortgage payment	Adds a second payment when you draw	Adds a second, fixed payment
Rate	Your existing mortgage rate, unchanged	Usually variable	Usually fixed
Upfront cost	A fee, roughly $150 to $500	Varies. Some charge little or nothing, others have closing costs or annual fees.	Closing costs are common
Qualifying	Usually no credit check or appraisal	Credit, income, and equity check, often an appraisal	Credit, income, and equity check, often an appraisal

"Recast now, borrow it back later if I need it"

The biggest downside of a recast is that the money is locked in your house. Some people plan to open a HELOC as a backstop: recast to lower the payment, and draw on the line if an emergency comes up. That can work, but go in knowing the risks:

You have to qualify. A HELOC depends on your credit, income, and equity when you apply. If you lose a job or your credit drops, you may not be approved, which is exactly when you'd need the money.
Lines can be frozen or reduced. Lenders can freeze or cut HELOC limits if home values fall or your finances change. Many did during the 2008 housing downturn.
The rate is usually higher, and usually variable. If you borrow the money back at a higher rate than your mortgage, you're paying more than you saved by recasting.
It's another bill. Drawing on a HELOC adds a payment, which works against the lower payment you recast for.

If you'd open a HELOC anyway, it's sensible to have it in place before you need it, while you still qualify. But a HELOC isn't a replacement for an emergency fund. Many people keep several months of expenses in cash and recast only with money beyond that.

Don't borrow to recast

Using a HELOC or home equity loan to fund a recast rarely makes sense. You'd be swapping part of your mortgage, often at a lower, fixed rate, for new debt at a higher or variable rate, plus fees. Your mortgage payment would drop, but your total monthly cost and interest would usually go up.

For example, if you drew $30,000 on a HELOC at 8.5% to recast a 6.5% mortgage, the interest alone on the HELOC would be about $212 a month, while recasting $30,000 on a $320,000 mortgage with 27 years left would lower the mortgage payment by only about $197. You'd pay more each month for nothing. The rates here are only an illustration; plug in your own.

Where a HELOC and a recast work together: buying before you sell

One combination that can make sense is the buy-before-you-sell plan:

Open a HELOC on your current home before you list it. Lenders often won't open one on a home that's already for sale.
Draw on it for the down payment on your new home.
Sell your old home, and use the proceeds to pay off the HELOC.
Put the rest toward the new mortgage and recast to lower the payment.

You'll carry two homes and the HELOC for a while, so plan for that. Our guide to recasting after buying a new home covers the full plan and other alternatives, such as bridge loans and contingent offers.

Which fits your situation?

You have extra cash and want a lower payment: a recast. Keep an emergency fund outside the house. See is a recast worth it?
You need cash for a project or expense: a HELOC or home equity loan, compared against a cash-out refinance.
You're buying before selling: possibly both, in sequence.
You want a backstop after recasting: a HELOC can help, but don't count on it as your only safety net.

Frequently asked questions

Can I recast a home equity loan or HELOC?

Recasting is offered on first mortgages. HELOCs work differently: during the draw period, payments are often interest-only and based on what you owe, so paying down the balance lowers the payment anyway. Check your HELOC terms.

Does a HELOC affect my ability to recast?

Your servicer's recast rules apply to your first mortgage. Having a HELOC usually doesn't prevent a recast, but ask your servicer.

Does recasting change how much I can borrow with a HELOC?

It can increase it. Paying down your mortgage raises your equity, and HELOC limits are based on equity. Approval still depends on your credit and income.