When most people think about real estate loans, they immediately think of residential mortgages. Generally speaking, most residential mortgages are for 15 or 30-year terms. Residential mortgages are a
A fully-amortized term loan means that the whole loan balance will be paid off over the life of the loan. For example, lets say you take out a 30-year mortgage. Assuming that you pay the loan like clockwork every month, the loan will be fully paid off after 30 years.
Many commercial real estate loans have a shorter term (5, 10, or 15 years), but are amortized over a longer period (20 or 25 years). This means that the loan is repaid as if the loan is over the longer period in terms of the monthly payment, but the loan comes due in a shorter amount of time.
When a loan is amortized over a longer period than the term, there will be a principal balance remaining on the loan at the end of the term. This is often referred to as a “balloon”. At this time, the borrower will either have to pay off the balance of the loan, or more commonly, refinance the loan. If the borrower refinances the principal balance over a new term, the principal balance will be “re-amortized” over a new period. Oftentimes, the new loan will also be amortized over a longer period than the term again.
Have you ever wished you could lower your monthly loan payments? Many borrowers face financial hardship and struggle to make large monthly payments. The good news is you may be able to re-amortize your loan and reduce your payments. Keep reading to learn what loan re-amortization is, how it works, and whether it’s the right option for your financial situation.
What Is Loan Re-Amortization?
Re-amortizing a loan means recalculating your payment schedule based on your remaining loan balance and term length. To re-amortize, you make a lump sum payment toward your loan principal. This lowers your overall balance, allowing lower monthly payments over the remaining term.
Re-amortization is also called loan recasting. It’s different from refinancing in that you don’t take out a new loan. You simply adjust the payment schedule on your existing loan. This saves you refinancing costs like application fees, closing costs, and points.
When to Consider Re-Amortizing Your Loan
Re-amortizing can provide payment relief if you’re struggling with high monthly payments. Making a lump sum payment toward principal is like hitting a reset button on your amortization schedule. Your lender recalculates your payments based on the updated loan balance. This lowers your monthly payments without extending your loan term.
Another reason to re-amortize is if you want to pay off your loan faster. You could continue making the same payments as before to get ahead on principal. Re-amortizing lets you pay down principal faster without increasing monthly payments.
Re-Amortizing vs. Refinancing: Key Differences
Re-amortizing and refinancing both let you reduce your payments. But they work differently:
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Re-amortizing keeps your current loan and adjusts the payment schedule. You avoid refinancing costs.
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Refinancing means replacing your current loan with a new one. You pay closing costs but could get a lower rate.
Re-amortizing is simpler and cheaper but doesn’t change your interest rate. Refinancing costs more upfront but may save more long-term if rates are lower.
Refinancing also resets your payment term. Re-amortizing simply recalculates payments over your remaining term. And refinancing requires you to requalify based on your current income and credit. With re-amortization, there’s no requalification since you keep your existing loan.
How to Re-Amortize Your Loan in 4 Steps
Follow these steps to re-amortize your loan and reduce your payments:
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Contact your lender: Ask about their re-amortization policy. There may be fees.
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Make a lump sum payment Pay as much as you can toward your principal. The more you pay the lower your new payments will be.
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Ask your lender to recalculate payments: They’ll create a new amortization schedule based on your updated balance.
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Review the new payment terms: Make sure you’re comfortable with the new monthly payments over the remaining term.
That’s it! Once your lender adjusts your payment schedule, just continue making the new monthly payments until your loan is paid off.
How Much Can You Reduce Your Monthly Payments?
Generally for every $10000 you pay toward principal, you can expect to reduce monthly payments by around $100. But the exact savings depend on factors like
- Your remaining loan term
- Interest rate
- Original loan amount
Use an online calculator to estimate your new payment amount after re-amortizing. Enter your current balance, then subtract your planned lump sum payment amount to estimate the savings.
Pros and Cons of Re-Amortizing a Loan
Before deciding to re-amortize. weigh the key pros and cons
Pros
- Lower monthly payments
- No loan application or refinancing costs
- Keep your current interest rate and term length
- Pay off your loan faster if you maintain the same payments
Cons
- You need available funds for a lump sum payoff
- Interest savings not as much as refinancing at a lower rate
- Your rate and term remain unchanged
Overall, re-amortizing is best if you want cheaper payments but can’t qualify to refinance. Paying down principal also lets you pay off your loan faster.
Alternative Ways to Reduce Your Payments
If re-amortizing your loan isn’t feasible, here are a few other options for lowering your payments:
- Refinance your loan to get a lower interest rate or extend your repayment term
- Consolidate debts with a personal loan that has a lower monthly payment
- Modify your loan terms, if available from your lender (e.g. forbearance, different payment plan)
- Sell assets to come up with extra money for a principal paydown
The right option depends on your financial situation. Talk to a loan officer to discuss the pros and cons of each approach.
Frequently Asked Questions (FAQs)
Below are answers to some common questions about re-amortizing loans:
Can I re-amortize my mortgage?
Most lenders allow re-amortizing mortgages. There may be fees and eligibility requirements. Contact your mortgage company to discuss options.
Can I re-amortize a federal student loan?
Unfortunately re-amortization isn’t available for federal student loans. But you can consolidate or change repayment plans to lower payments.
What is the benefit of re-amortizing vs. refinancing?
The main benefits are avoiding refinancing costs, keeping your current rate/term, and paying off your loan faster if you maintain the same payments.
How many times can I re-amortize my loan?
There is usually no limit, but each re-amortization may have fees. Check with your lender on any restrictions.
Can I re-amortize my auto loan?
Most auto lenders do allow re-amortization. Contact your lender to ask about requirements and any fees involved.
The Bottom Line
If you’re looking for ways to reduce your monthly loan payments, re-amortization is an option worth considering. Paying down your principal upfront saves on interest and allows your lender to recalculate and lower your payments.
Carefully compare re-amortizing to refinancing. While refinancing costs more, you may benefit from a lower rate long-term. Weigh the pros and cons and talk to your lender to decide if re-amortizing is the right choice for your financial situation.
What Does It Mean To “Re-Amortize” A Loan?
When you hear someone talk about “re-amortizing” a loan, they are talking about refinancing a the principal balance of a loan over a longer period. By refinancing a loan over a longer amortization, the amount of monthly principal due is lower, resulting in a lower monthly payment for the borrower. When most borrowers refinance a loan to re-amortize the principal balance, it is with the goal of reducing their monthly payment and improving their cash flow.
Why Are Commercial Loans Structured This Way?
The longer the loan amortization, slower that the loan principal gets paid back. Even though a bank may be willing to amortize a loan over an extended period, keeping the term of the loan shorter helps bankers evaluate the quality of the borrower and loan more frequently.Â