Refinance vs. Debt Restructuring

by Neil Kokemuller

To improve the interest rate and terms on your mortgage loan, you can refinance your mortgage or restructure your debt. Your current mortgage situation and your ability to cover the costs associated with a refinance should help you decide which move is right for you.

Refinance Basics

Refinancing is a common move when interest rates drop after you purchase a home. If you finance a home at 6 percent interest, for instance, and rates drop to 4 percent, a refinance may be in order. You typically consult with your mortgage lender to discuss your options based on current rates and your credit, income and debt. In a straightforward refinance, you pay closing costs again and reamortize your loan schedule to 15, 20 or 30 years.

Pros and Cons

Refinancing is the simpler, more common way to get a new mortgage loan. When interest rates fall significantly, a new mortgage can reduce your monthly payments and save you thousands in interest over time. Lower interest also means more of your payments go toward principal, increasing your equity in the home more quickly. But refinancing has a downside. Closing costs you pay to get the new loan are one of these; you have to decide whether you'll stay in the home long enough to recover those costs. Because mortgage interest is usually tax deductible, your savings in interest is slightly offset by a reduced tax deduction.

Restructure Basics

The Making Home Affordable Program, a joint initiative of the departments of Treasury and Housing and Urban Developed, began in 2009 to help homeowners hurt by the collapse of the housing market and the economy. It makes mortgage restructure an option for homeowners who don't quality for refinancing. Your lender simply makes temporary or permanent changes to the rate, terms, monthly payments or amortization schedule of your existing loan. If you have already missed payments, your past due amount can be rolled into the loan.

Pros and Cons

Banks normally prefer a refinance when you can afford it and you have good credit. A restructure is used when you are underwater on your mortgage and can't keep up with current mortgage payments, let alone pay for a refinance. A restructure can lead to lower rates, lower payments and rolling of your past due loan payments into a new loan balance. A drawback to restructures is that they aren't available for investment properties, as the intention is to assist struggling primary homeowners.

About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.

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