Four ways to lower your mortgage payment
If you need more cash in your wallet each month, consider changing up your mortgage. Here are four strategies for increasing your cash flow.
Re-amortizing your loan
You don’t need to reduce your rate to lower your payment. Want proof? Try this exercise, using a refinance calculator. Here are your inputs:
- Current loan amount (original amount of current loan): $200,000
- Interest rate: 4%
- Term: 30 years
After three years, your balance would be $188,997 (from an amortization schedule). Here’s your new loan:
- Current mortgage balance (this is your refinance mortgage amount): $188,997
- Interest rate: 4% (unchanged from your current loan)
- Term: 30 years
Guess what? Even if you refinance at the same mortgage rate, your payment drops $53 from $955 to $902. Only because you stretched the repayment of your current balance over a new 30-year term. This is referred to as “re-casting” or “re-amortizing” your loan. Do you need to refinance to accomplish this? Not necessarily. Many lenders offer this service to their borrowers for a fee of about $250.
NOTE: The lower payment comes at a price – because you take 33 years to repay your loan instead of 30, your total payments are $15,463 more over the life of the loan.
Extending your repayment
Taking this same idea a little further, you can lower your payment even more by refinancing to a longer mortgage term. You can find mortgages that amortize over 15 and 30 years, but also over five, ten, 25, 40 and 50 years. Refinancing the $188,997 balance at four percent over 40 years gets you a payment of $790, $165 a month less than the original $955. Again, you’re now stretching out your repayment over 43 years, and over the life of the loan it would cost you $69,783 more. A 50 year term at four percent (yes, they’re out there) drops your payment by $226 per month and costs you $128,020 more over the life of the loan.
There are many reasons you might need to reduce your mortgage payment, and lowering it with a longer term is not necessarily a bad thing – as long as you are not wrongly convinced that you are “saving” money.
Choosing an interest-only refinance
Some lenders don’t require you to begin paying off your mortgage balance right away – only that you pay your interest each month. These so-called interest-only (I/O) mortgages have two stages – an interest-only phase and an amortizing phase in which you pay off your balance. A four percent interest-only loan with a typical five-year interest-only phase gets you a payment of $630 – a whopping $325 less than your original payment!
HOWEVER, after the I/O phase, you have to begin repaying the loan – that means your balance must be repaid in only 25 years instead of 30, which increases your payment to $998 in year six. That’s not necessarily a bad thing as long as you have a plan for making that higher payment after the first five years.
Decreasing your mortgage rate
Tried and true -- refinancing to a lower mortgage rate is the only way to pay less each month and possibly less over the life of your home loan. Let’s go back to our three-year-old four percent mortgage and its $188,997 balance. We can use the Mortgage Checkup Tool to see which common refinance mortgages can reduce our monthly payment. Here is a sample of some actual results (which change frequently – yours may vary).
Program Amount Rate Old Pmt New Pmt Difference
30 Year Fixed $188,997 3.375% $954.83 $835.55 $119.28
15 Year Fixed $188,997 2.750% $954.83 $1,282.58 -$327.74
5/1 hybrid ARM $188,997 3.375% $954.83 $1,260.21 -$305.38
Any of these methods can reduce your monthly payment. You can even combine some of them – for instance refinancing to a lower rate and adding an interest-only option. A savvy loan officer can help you sort through the choices and choose the best one for your needs.
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