If you’ve thought about restructuring your mortgage, you no doubt have certain goals in mind. Maybe you want to free up funds for a purchase, reduce your monthly costs, or pay off the mortgage faster.
There are three strategies that can work to restructure your mortgage:
- Send in extra money to pay down principal.
- Recast your mortgage.
- Refinance your loan.
Around 40 years ago, Marc Eisenson coined the term “banker’s secret,” which promoted a cost-saving idea. It’s quite simple: pay more per month than required on your mortgage. Eisenson says, “It was a secret that bankers knew, but didn’t share with their customers.”
Here’s how it works. If you take out a $200,000 30-year mortgage at an interest rate of 6%, and just make the minimum payments, you’ll pay a total of $382,537.97 for your home, including interest of $182,537.97. However, if you send in just an additional $100 each month, you’ll save more than $49,000 in interest over the term of the loan.
And for the bonus: You’ll pay the loan off over 5 years early! It’s an easy way to restructure your loan without extra fees or hassles.
You can also pay off your loan early with a bi-weekly payment plan. Your bank can set this up, but they may charge a lot of money for this service. If you have the self-discipline to do this yourself, that’s the way to go.
With this strategy, you make half your monthly mortgage payment every two weeks, which equals 13 payments a year instead of 12. With bi-weekly payments on a 30-year $200,000 loan, you’ll save more than $49,000 in interest over the course of the loan, and pay it off approximately five years earlier.
Other ways to easily do it yourself:
Make one additional mortgage payment per year at any time.
Divide your monthly payment by 12, and add that extra amount each month when you pay your mortgage.
Recast Mortgage for Lower Payments
Another way to restructure your loan is called to recast it. You’ll need at least $5,000 to recast your mortgage. Recasting a loan changes the principle balance, not the interest rate or term.
Here’s how it works: You’ve been paying your mortgage for 10 years at 6%, with a monthly payment of $1,432.86. You balance is now $200,000. You contribute an additional $20,000 in the recast. Now your principle is $180,000, and you still have the remaining 20 years to pay it off at 6%. Now your new monthly payment has been reduced by $143.28, making the payment $1,289.58.
It will usually cost a fee for this service. The bank doesn’t make anything from this, except retaining you as a customer. As such, they usually won’t promote this method. Not every lender will recast a mortgage, but it never hurts to ask.
Refinance Your Loan
Refinancing a loan is the most common method of restructuring. In this case, you’re replacing your current mortgage with a new one at a lower rate. If you took that same $200,000 balance on your 6% mortgage and refinanced into one with a 5% interest rate, you’d reduce your monthly payment from $1,199 to $1,074, saving $125 monthly.
Keep in mind that this method is the most challenging, so you need a good credit score and solid job history. There are also closing costs, which can run 3% to 6% of the loan amount.
These tips are appropriate if you’re current on your mortgage and have extra money. Struggling home owners should consider the government-sponsored Home Affordable Modification Program (HAMP)