There are ways home owners can restructure their home loan.
Typically, when changing the nature of an existing mortgage it means
refinancing out of one loan and into another. For those who might consider
refinancing a mortgage, the biggest reason is usually because rates are lower
than when they locking in the interest rate on their loan while it was being
approved. Interest rates don’t have to fall to a “magical” level in order for a
refinance to make sense. Instead, borrowers should compare how much they would
save each month with the closing costs involved in the transaction. Doing so
will provide how many months it will take to “break even” as it relates to
closing costs. It’s less about the interest rate and more about recovering the
cost of refinancing through lower payments. Once accomplished, it’s a real
But there are costs involved, no doubt. Borrowers can work
with their lender to see if a closing cost credit is available but there are
fees nonetheless. However, borrowers can restructure their loan without
refinancing simply by making additional payments. Mortgages today have no
prepayment penalties so any extra payments will go toward the principal balance
and shortening the loan term. This applies to fixed rate programs. When making
extra payments to an adjustable rate mortgage, the monthly payments drop but
the term remains the same.
The third way to restructure a mortgage is with what lenders
refer to as a recast. A recast is a transaction where the borrowers make a lump
sum payment to their loan balance and the lender then reamortizes the loan for
the remaining term. Let’s say that someone has a 30 year loan but is 10 years
into it. The borrower gets a bonus from their employer and the borrower decides
to pay down the mortgage. But instead of just paying down the mortgage balance
there is a request for a recast. The borrower pays the lender a lump sum of say
$25,000. The lender lowers the principal balance by that amount and the lender
then amortizes the loan over the remaining 20 years. This means less interest
to the lender over the remaining 20 years and lower monthly payments.
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