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.