How to Restructure Your Mortgage to Save a Ton of Money

Whether you’re having trouble making your mortgage payments each month, are looking to free up a little more cash to put it towards something else, or want to save money in interest over the life of your loan, there are ways to lower your monthly mortgage payments.

Restructuring your mortgage can help you shave a few bucks off your monthly debt obligations. How your mortgage is structured when you first obtain it doesn’t necessarily have to remain that way forever. No matter what your specific needs and goals are, there are a few strategies available to restructure your mortgage.

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Put More Money Towards the Principal

This option is more for homeowners who are comfortable making their monthly payments, but are looking to save on the amount of interest they pay over the life of their mortgages. Putting more money towards the principal portion of the mortgage can save you a ton of money by the time your mortgage has been paid off in full. It can also help you shorten the life of the mortgage so you can be mortgage-free sooner rather than later.

Let’s say you’ve got a $200,000 mortgage amortized over 30 years at a fixed rate of 5%. You would be paying a total of $386,512 by the end of the entire term; that figure includes $186,512 of interest in addition to the original $200,000 principal balance.

However, if you put in an extra $2,000 per year, you can save $46,628 in interest over the life of the mortgage. You can even put in a few extra dollars monthly rather than contributing an annual lump sum. The kicker is that such extra payments go strictly towards the principal balance.

Refinance Your Mortgage

The most common way for homeowners to restructure their mortgages is to refinance it. The goal is to replace the current home loan and associated interest rate with a new one at a lower interest rate. Depending on the difference between the rate you’re paying now and the new one, you could be saving tens of thousands of dollars over the life of the loan.

Using the same $200,000 principal balance example with a 5% rate, you would lower your monthly payments from $1,074 to $955 by refinancing to a mortgage with a 4% interest rate.

Of course, you’ll need to consider the penalty fee associated with breaking your mortgage prematurely to see if it’s worth it. Prepayment penalties are typically 80% of six months’ interest. If, for example, you have a mortgage rate of 5% on a $200,000 mortgage amount, your interest-only payment would be $833 per month. Multiplying that by six months would give you $4,998, and 80% of that amount would mean you’d owe $3,998.04 as a prepayment penalty.

With savings of $119 a month after refinancing ($1,074 – $955), you would recoup that penalty amount in over 33 months, or just under 3 years. But in order to get approved for a refinance, you’ll need to have a really good credit score and healthy job history.

Recast Your Mortgage

If you’ve got at least $5,000 to spare, you can reduce your monthly mortgage payments by recasting your mortgage. It’s similar to a refinance, but with a recast, there is no change to your interest rate. Instead, your principal balance changes.

If you started out with a $200,000 mortgage at 5% interest for 30 years, your monthly mortgage payments would be $1,074. After paying for 10 years, the remaining balance of the mortgage would be $162,684. If you contributed $10,000 to the remaining principal amount, your balance would be brought down to $152,684. In this case, your monthly mortgage payments would be lowered to $1,008.

It’s important to keep in mind that even though you’d be saving $66 per month, you’ll have spent a lot of money to get that reduction in payment – $10,000 in this example. If you plan on staying in your home for a long time, this could be a viable option. If not, recasting may not be the right choice for you.

Defer a Few Months of Payment to the Back of the Mortgage

If you’re in real financial dire straights and are vulnerable to going into foreclosure because you can’t make your mortgage payments, you may be able to ask your lender to defer a few months’ worth of payments. Basically, this strategy involves holding off on paying your mortgage and paying back at a later time. You’re still under obligation to pay that money back at some point, but at least you’ll have some time to get your finances together without having to pay temporarily.

Your lender will assess your particular situation to see if you qualify for such an arrangement. Whether or not this tactic will work well for you depends on the policies of the mortgage company, when you plan on making the deferral, and whether your finances will allow you to eventually make those payments.

Home Affordable Modification Program (HAMP)

If you’re really struggling to meet your payments every month, you may be able to qualify for the government-sponsored Home Affordable Modification Program (HAMP) to restructure your mortgage.

HAMP will give you a more affordable monthly payment by adjusting the interest rate, extending your term, or even lowering your principal amount. HAMP homeowners usually save around $500 a month with this program. If you owe a lot more on your mortgage than what your home is worth according to current market conditions, you’ll be automatically evaluated to have your principal amount reduced. You could earn as much as $10,000 if you make payments on time, which you would then be put towards lowering your principal balance.

In order to qualify for HAMP, you’ll have to meet certain criteria:

  • You’re having a hard time making your mortgage payments because of weak finances;
  • You’re at risk of falling behind on your mortgage payments;
  • You’re already delinquent on your mortgage;
  • You got your mortgage on or before January 1, 2009;
  • Your home hasn’t been condemned.

If you meet the above criteria, you might be able to be approved for HAMP to significantly reduce your monthly mortgage payments and avoid foreclosure.

Whatever your reason for restructuring your mortgage, it’s important to have a serious look at your current finances, and consider your future goals. Speak with a seasoned mortgage specialist who’s experienced in restructuring mortgages to see what option fits your specific situation.