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 money saver.
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.