Refinancing and restructuring are each popular options for dealing with a problematic mortgage that is creating debt payments borrowers can no longer make. Sometimes refinancing is used to get better mortgage terms, even though there is no danger of defaulting. If borrowers are struggling and must choose between the two, refinancing is typically a better option. But the choice depends on specific financial information, and can vary based on the borrower.
Refinancing
Refinancing replaces the first mortgage with a new mortgage. The old home loan is paid off entirely and the borrower does not need to worry about it anymore, but the new loan has its own monthly payments that must be taken care of. Refinancing can be used as a type of debt consolidation --- homeowners borrow more than they need to pay off their mortgage and take care of other debts too, like credit card balances.
Restructuring
Debt restructuring does not replace the original mortgage with a new loan, like refinancing does. Instead, it changes the loan in some fundamental way that makes it easier for borrowers to pay off. Lenders must agree to restructure a loan, and they often decide what type of restructuring to do. Some pause payments to give borrowers a chance to recover. Others lower interest rates to reduce monthly payments, or combine late payments back into the loan to make it easier to pay off.
Timeframe and Credit
The choice between refinancing and restructuring often comes down to credit. If at all possible, the borrower should try to change debt before it begins to drop credit ratings, which occurs in the case of late payments and defaults. Unfortunately, most lenders will only agree to drastic restructuring after late payments have already become a problem. Borrowers should try to use a refinance to avoid credit issues, or prove to the lender that they are not making enough income to deal with the debt.
Rate Options
Borrowers also have the ability to change their rate with both refinances and restructuring. There is is one key difference: refinancing only allows borrowers to qualify for rates that the current market allows. Restructuring is a lender's unique choice to lower the rate on one loan, usually a variable rate mortgage. If rates are rising in the market, then borrowers will be able to get a lower rate through restructuring more easily.
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