Definition of Reamortization

by Kristen May, Demand Media

Amortized loans are those that have a fixed repayment term and equal payments each month during that term. Reamortization occurs if at some point the lender recalculates the monthly payments during the repayment term. The concept of reamortization most commonly applies to mortgages, but it can be used with any type of loan that's amortized.

What Is Reamortization?

Reamortization changes a borrower's monthly payment amount so that the payments repay the accrued interest and full principal of a loan by a specific date. Amortized loans typically have the same monthly payment for the whole repayment term, but there are situations that require the lender to recalculate payments so the loan is paid off by a specific end date.

When Reamortization Occurs

Four major circumstances may lead to reamortization. The first is if a borrower refinances a loan, thereby changing the interest rate, repayment period and sometimes, through a down payment or a cash-out refinance, the balance as well. The new payments must be based on the terms of the refinanced loan. Second, a borrower might make a large extra payment and request a reamortization to recalculate the payments for the duration of the existing period based on the new lower balance. Third, an adjustable-rate loan is reamortized every time the interest rate changes, using the remaining repayment period and balance but the new interest rate. Finally, if a loan is past due, the lender might offer to reamortize it by adding the missed payments to the scheduled principal balance so the borrower gets up to date and makes the missed payments in the form of slightly higher monthly payments.

Calculating Reamortization

Calculate new monthly payments through reamortization the same way you calculate the monthly payment the first time you amortize a loan. Calculate the monthly payment manually with the formula P[r(1+r)^n]/{[(1+r)^n]-1}, where "P" is the principal amount owed, "r" is the decimal monthly interest rate, and "n" is the number of monthly payments remaining. For a simpler method, use an online amortization calculator. Enter the remaining principal balance on the loan and the current interest rate, both of which you'll find on your most recent monthly loan statement. Also enter the number of remaining payments in the repayment term. The calculator gives the monthly payment and an amortization chart showing the amount of each payment that goes toward principal and interest.


Reamortization may either help or hurt you, depending on the circumstances. If you're looking to lower your monthly payments, reamortizing after making a large principal payment is helpful in stretching out the payments instead of paying off the loan early. In addition, reamortizing through a refinance stretches payments over a longer time frame, which also lowers monthly payments. However, lower monthly payments come at the cost of more interest because a smaller percentage of each payment goes toward reducing the principal. If you have a variable-rate loan, consider reamortization carefully when setting up a budget: The loan payment could increase or decrease each time the loan is reamortized.

About the Author

Kristen May holds a Bachelor of Arts in psychology, specializing in childhood development. She has been writing for several online publishers covering topics such as entertaining, parenting, cooking, health and wellness, marriage and personal finance.

Suggest an Article Correction