A mortgage is reamortized when the way that the remaining balance is repaid is recalculated because of a change in the interest rate, the balance or the time you have to repay the mortgage. With lenders offering increasingly complex mortgages, it's helpful to have a basic understanding of what "amortization" means and how mortgages can reamortize depending on their terms or your circumstances, in order to make sound financial decisions.
What Is Amortization?
Amortization is the way in which your mortgage payments are scheduled to pay off your total mortgage within a certain period of time. Since your lender charges an interest rate for lending you money, paying off your mortgage within a set time isn't as simple as dividing the balance by the number of months in your mortgage, though it isn't terribly complicated either. Part of your monthly mortgage payment goes to paying your original debt, known as principal, and another part toward interest. The interest portion is a percentage of your mortgage balance that month, and the principal portion is the difference between your monthly payment and that interest. This means that when your balance is large, like it is at the beginning of the mortgage, the interest portion of your monthly payment is large, and, thus, the principal portion is small. By the same token, when your balance is small, as it is toward the end of your loan, your interest portion is small and your principal portion is large.
Adjustable Rate Mortgages (ARMs)
Adjustable rate mortgages, or ARMs, are one of the most common situations in which a mortgage is reamortized. When your lender resets your mortgage's interest rate, it reamortizes or recalculates your monthly payment based on the new interest rate, your mortgage balance and the number of months left in your mortgage. If you've made additional payments to reduce your mortgage balance before the rate change, your new monthly payment will be lower than if you had kept a higher balance.
Negative amortization occurs when the monthly payment needed to cover principal and interest at that rate and mortgage term is higher than the monthly payment you're actually making. The interest that you aren't paying because of the lower monthly payment is being tacked on to your mortgage balance until the next interest rate adjustment when your loan will reamortize based on a larger balance, not a smaller balance as should usually happen, hence the term "negative" amortization.
Mortgage modifications lower your monthly mortgage payment by extending the number of years you have to pay back your loan, reducing the interest rate or making part of the principal due in the future. Since the length, rate or balance changes with a modification, your lender will reamortize the mortgage based on those changes.
Refinancing refers to paying off your mortgage (or mortgages) with a new mortgage, sometimes to take advantage of a lower interest rate or to take out a new mortgage that is larger than the balance of the previous mortgage in order to use that difference to finance home improvements or pay off loans that have higher interest rates. In either case, you may be effectively reamortizing the original mortgage amount with a new lender because the amount, term or interest rate is different than that of the previous lender.