Reamortize

Reamortize refers to the process of recalculating the payment schedule of a loan, typically a mortgage, after an event that alters the loan's principal balance or interest rate. This recalculation adjusts the future payments to ensure the loan is still paid off by its original maturity date.

A common reason for reamortization is a change in interest rate, especially for adjustable-rate mortgages (ARMs). When the interest rate on an ARM adjusts, the remaining balance is spread over the rest of the loan term at the new interest rate. This results in new monthly payments that are either higher or lower, depending on whether the rate increased or decreased.

Another scenario for reamortization occurs when a lump sum payment is made towards the principal. While making extra payments usually shortens the loan term and reduces the total interest paid, reamortizing can be an option if the borrower wishes to maintain the original payment amount and shorten the term significantly. This is less common than simply letting the extra payments reduce the term naturally.

Reamortization is distinct from refinancing. Refinancing involves obtaining a completely new loan to pay off an existing one, often to secure a lower interest rate or change the loan terms. Reamortization, on the other hand, is an adjustment to the existing loan's payment structure without replacing the loan itself. Lenders may charge fees for the administrative process of reamortization.