When homeowners look to reduce their monthly mortgage payment or plan to pay off a mortgage early, many turn to refinancing. While refinancing a mortgage does allow homeowners to take advantage of lower interest rates, not all borrowers are able to qualify for a mortgage refinance loan. If this is the case, a lesser-known option is still available to help borrowers achieve their goals. Re-amortization, also known as loan recasting, allows borrowers to recalculate their principal for the term of the loan.
Here we take a closer look at both options and how to decide which is best for you.
- Understand the difference between mortgage loan refinance and loan re-amortization.
- Learn when each option may provide the best benefits.
- Explore how each option works as well as the eligibility and requirements.
Loan refinance vs loan re-amortization
In order to make the best decision for you and your loan, it is essential to understand the difference between a standard loan refinance and a loan re-amortization. Here we take a closer look at each option.
The purpose of a mortgage loan refinance is to qualify for a new mortgage loan, often with a new principal amount and an improved interest rate, that will be used to pay off the initial mortgage, leaving the borrower with one monthly mortgage payment. Similar to the original mortgage, borrowers will need to apply for the refinance loan in a similar manner as they did the original mortgage. Proof of income and employment, credit reports, and home appraisals are all necessary for approval. Once the refinancing loan is approved, you will again go through closing, where you will need to pay any closing costs that are not rolled into your new loan.
When choosing to refinance, you must also decide which type of refinancing you will apply for. Some top refinance loan options include:
- Cash-out refinance
- Cash-in refinance
- Rate and term refinance
- FHA, VA, or USDA streamline refinance
- Reverse mortgage
Loan re-amortization is not a new loan, but rather an adjustment to your current mortgage. With a re-amortization, the borrower makes a lump-sum payment toward the principal of the loan. At this point, new payments are recalculated based on the new remaining principle. This new payment schedule, known as an amortization schedule, retains the same interest rate and loan duration as your original mortgage loan, but the payments are now reduced based on the lower principal amount. Keep in mind that mortgage re-amortization is not offered by all lenders and is not available for all loan types. For example, re-amortization is not available for FHA and VA loans.
Reasons to refinance a loan
Borrowers can choose to refinance a mortgage for a variety of reasons. Some of the most common reasons include:
- Change the term of the loan: With refinance, you can choose to shorten or extend your loan term. For example, if you currently have a 15-year term but want to reduce your monthly payment, refinancing to a 30-year term can do that. In contrast, if your original mortgage was for a 30-year term but you are now able to afford higher monthly payments, refinancing to a 15-year term will save on interest overall.
- Lower your interest rate: If rates are lower than when you got your original mortgage, now may be the time to refinance, lowering your interest rate and your monthly payment.
Change the type of loan: If your original mortgage was an adjustable-rate mortgage, you may decide to refinance to a fixed-rate mortgage.
- Remove a person from the mortgage: In cases of divorce, for example, it may be necessary to remove one of the original borrowers from the mortgage.
- Cash-out equity: A cash-out refinance allows you to borrow against existing equity in the home, meaning you will receive cash at closing that can be used for home improvement or debt consolidation.
Reasons to re-amortize a loan
Re-amortization can be a beneficial choice over mortgage refinancing in a variety of circumstances. Here we look at when it might be good to consider re-amortization.
- You have cash available: Re-amortization requires an upfront principal payment in order to qualify, so if you have received a cash gift or have substantial savings, this can be a great way to build equity while also reducing your monthly payments.
- You are happy with your interest rate, terms, and lender: Because a re-amortization simply recalculates your current mortgage, it allows you to reduce payments while increasing your home equity.
- Your credit is less than perfect: A mortgage refinance is essentially a new loan requiring a credit check, proof of income and employment, and approval. If your credit score has changed or your income and current employment status are not ideal, then you may not be approved for refinancing. Re-amortization allows you to reduce your monthly payments without the need for loan approval.
- No home appraisal or closing costs: Because re-amortization is not a new loan, you will not be required to have a home appraisal or pay closing costs.
How does loan refinancing work?
Refinancing works similarly to the original home-buying process. Here we walk through each step you can expect.
Similar to applying for your original home mortgage, a refinance requires an application. Before you apply, you need to determine the type of refinancing loan you want to apply for. Once you apply, your lender will evaluate your income, assets, debts, and credit score in order to determine if you meet the new loan requirements.
Just as you did with your initial mortgage, the lender will require a home appraisal in order to determine the current home and property value. The home’s value will need to be equal to or higher than the loan amount you have applied for.
Once the lender receives your application, the underwriting process begins. During this process, the lender evaluates your financial information and home appraisal to determine whether you qualify for the loan terms and, if applying for a cash-out refinance, how much money you may be approved for.
Once everything is complete, it is time to close on your new loan. At your closing, you will go over all the details of your new loan and, if you applied for a cash-out refinance, you would receive your funds at closing.
How does loan re-amortization work?
Loan re-amortization occurs through your current lender. To begin, contact your lender to see if they offer re-amortization and what their requirements for a lump-sum payment are. These can vary by lender, but common requirements include a positive payment history and a specific lump-sum payment amount ranging from $5,000 to $50,000. Because re-amortization is not a new loan, you simply need to pay the lump-sum amount and your lender will use the new balance to calculate a new, lower monthly payment. While there are no closing costs or home appraisal fees, there is often an administrative fee which can be several hundred dollars.
Eligibility and requirements
When it comes to eligibility and requirements for mortgage refinancing or re-amortization, it depends on the type of loan of your original mortgage and, in the case of refinancing, the type of loan you are pursuing. For example, if your current loan is an FHA or VA loan, re-amortization is not an option. In addition, lender requirements for re-amortization vary, so it is best to contact your lender directly.
For refinancing, eligibility and requirements vary based on the type of loan you are pursuing but can include minimum credit scores of 620, or 500 if you are looking at an FHA loan, a debt-to-income ratio under 45%, and your loan-to-value ratio.
Should you refinance or re-amortize your loan?
Whether you decide to refinance or re-amortize your mortgage loan will depend on a number of different factors. The best option will depend on your unique financial situation and which option provides you with the best benefits. Here we look at times when each option may be more beneficial than the other.
Refinance a loan
- Market rates are low, and your current interest rate will drop substantially
- Paying appraisal and closing costs is worth the amount of savings a new loan provides
- You are unhappy with your current lender, interest rate, or loan term
- Your credit score or financial situation has improved since your original loan
- You do not have the large lump sum available for re-amortization
- Your lender or loan does not allow re-amortization
Re-amortize a loan
- Your lender offers re-amortization
- You have a large amount of cash from family or work bonus and want to invest that into your home
- You are happy with your current lender, interest rate, and loan term
- You do not have large amounts of credit debt that would benefit from the lump sum payment
- You want to avoid additional closing and home appraisal costs
- Your credit score has gone down or you want to avoid a credit check
Choosing the right option for your loan
Both refinancing and re-amortization allow you to reduce your monthly payments and, in many cases, save money in the long run. Which option is best for you depends on your current financial situation and your home loan goals. For example, if you have a large lump sum of cash, would that be best used for re-amortization, or will it be better used to improve your overall credit or invested into savings to earn interest? As a borrower, you will need to evaluate which process provides you with the greatest benefit.
We are here to help
At Hero Home Programs, our goal is to help our heroes achieve and maintain home ownership. We understand that your refinancing or re-amortization options may be overwhelming or confusing and we are here to help walk you through the process and ensure you receive the greatest benefits. To learn more about how Hero Home Programs can help, contact us today.