BY BARBARA EISNER BAYER
You can refinance or recast your mortgage. Or you can create your own DIY mortgage restructuring plan. We compare so you can decide.
The way your mortgage is structured today doesn’t have to be the way it’s structured tomorrow. What are your goals? To free up funds, reduce your monthly nut, or pay off your loan more quickly?
These three strategies offer something for most everyone.
- Send in extra money to pay down principal.
- Recast your mortgage.
- Refinance your loan.
Send in Extra Money to Pay Down Principal
In the mid-1970s, Marc Eisenson coined the term “banker’s secret,” which promoted a cost-saving idea: Pay more than required on your monthly mortgage, and you’ll save a pile of money. 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 hold it to term, you’ll pay a total of $382,537.97 for your home, including interest of $182,537.97. However, if you send in just $100 each month in additional principal, you’ll save more than $49,000 in interest over the term of the loan.
There’s another huge perk: You’ll pay off the loan five years and five months ahead of schedule. This strategy puts you in total control of the restructuring process, and there are no fees involved.
Another way to pay off your loan early is to use a bi-weekly payment plan. Banks and third-party companies can implement this plan for you, but they’ll charge hundreds or thousands of dollars in fees. We don’t recommend you pay for the service unless you lack the self-discipline to make the payments yourself.
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.
If you want to lower your monthly payment and have at least $5,000 to contribute, you can request a mortgage recast. In this scenario, you don’t change the interest rate or term of your mortgage, you change the principal balance, and the term begins anew.
Here’s how it works: After 10 years of paying your 30-year mortgage with a 6% interest rate and a monthly payment of $1,432.86, your balance is $200,000. With a mortgage recast, you contribute an additional $20,000, and have a new principal amount of $180,000, with the same remaining 20 years to pay it off at 6%. However, your new monthly payment is $1,289.58, for a savings of $143.28 per month.
There’s a small fee for this service — approximately $250. The bank gets nothing out of this except retaining your loyalty, so they don’t promote it. It’s up to the lender whether it’ll do it, so all you can do is ask. It’s also likely to be a lengthy process. You have nothing to lose, however, except a higher monthly payment.
Refinance Your Loan
The most common way to restructure your loan is with a mortgage refinance, where you replace your current mortgage with a new one at a lower interest 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.
Refinancing may be challenging to get approved for in a tight lending environment, where you need stellar credit scores and a steady job history. You’ll also need to pay 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) for mortgage restructuring.