Your promissory note is a contract to borrow money. The terms are set the moment you sign, but you may have the opportunity to change those terms at some point during the life of the loan, typically to improve the repayment in your favor. This is known as restructuring or modifying the promissory note.
Contact Your Lender
The first step to restructure your promissory note is to contact the lender. The lender originally granted those terms based on a number of factors, including your financial strength, the value of the collateral, and the lender’s own rate environment. Inform your lender of the reason you wish to restructure the note. For example, you see interest rates have dropped significantly and you want to give your current lender an opportunity to match before your refinance. Or, perhaps you are in a situation where your income has decreased and you need to extend the term to lower your payments and increase cash flow. Be honest and willing to work with the lender to reach a restructure agreement that benefits you both.
When the lender agrees to contemplate a restructure, it needs to see your most recent financial statements. The lender wants to see what your debt-to-income ratio will be at the restructured terms, which gives the lender an indication of your ability to repay the loan. If the ratio is within guidelines, you will be in a good position to move forward. If not, the loan may be referred to the loan workout department to allow a temporary change in terms, known as a forbearance agreement, if a full restructure isn’t feasible.
The other side of the approval process involves making sure your collateral has sufficient value. Assets tend to depreciate over time, so the lender will assess the value, typically through an appraisal. This is especially relevant if you are increasing the term. If you go from five to 15 years on a loan secured by a home that has decreased in value, you will need to provide additional collateral to cover the extended term.
Complete the Restructure
Once the lender approves the restructure, you will sign loan documents. This will not be as extensive as a full mortgage closing. Rather, you will sign a loan modification document which references the original promissory note and recites the amended terms of the restructured note. Once signed, the new terms will go into effect as of the date of the modification agreement. The only other documents you will potentially sign are instruments to secure additional collateral, such as a mortgage, assignment or security agreement.