Reamortizing

Reamortizing is a process in finance, particularly in mortgage lending, where the payment schedule of an existing loan is recalculated. This recalculation is often done to extend the loan term, which typically results in lower periodic payments. The total amount of interest paid over the life of the loan will generally increase with reamortizing due to the extended period.

This can occur in several situations. For example, if a borrower has missed payments and is facing default, a lender might offer to reamortize the loan to make it more manageable. This essentially creates a new loan schedule based on the outstanding balance and a new term. Another common scenario is when a borrower decides to refinance a loan, and the new loan is structured with a different term than the original. This is a form of reamortizing.

The primary effect of reamortizing is the adjustment of the monthly payment amount. By spreading the remaining loan balance over a longer period, each payment covers less principal and interest per period, thus reducing the immediate financial burden on the borrower. However, it is crucial for borrowers to understand that this convenience comes at the cost of higher overall interest expenses throughout the extended loan term. Reamortizing is a tool that can provide short-term relief but requires careful consideration of its long-term financial implications.