October 22nd, 2016 2:45 PM by Jackie A. Graves, President
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
These three strategies offer
something for most everyone.
Send Extra Money to Pay Down
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
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
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.
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
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
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
By BARBARA EISNER BAYER - To
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