How to Lower Your Mortgage Payment by Refinancing
If you purchased your home with an Adjustable Rate Mortgage that is due to reset soon and you are concerned that you'll no longer be able to afford your payments when your lender adjusts the loan, refinancing could give you the peace of mind you need while freeing up hundreds of dollars in your budget, but what about the risks?
Refinancing with a lower monthly payment will save you money in the short term but you may pay more in finance charges if you lower your payment by extending the loan's term. You'll also be paying down the mortgage's balance at a much slower rate with the lower payment amount.
Two Methods for Lowering Your Payment
There are two ways of lowering your monthly mortgage payment that can be used together. The first method of lowering your mortgage payment when refinancing is by extending the term length of your new loan. Term length is simply the amount of time you have to repay the loan. The most common term lengths when refinancing your mortgage are fifteen and thirty years; however, there are now forty and even fifty year mortgages to choose from. To illustrate how extending your term length lowers your payments consider the following example.
Suppose you are refinancing your mortgage for $100,000 at a 6.25% mortgage rate. You are considering two term lengths: 15 and 20 years. With a 15 year term length your payment will $857 and you'll pay a total of $154,300 over the duration of your mortgage. By extending the term length to 20 years your payment will go down to $730 per month; however, you'll pay a total of $175,400 for the same loan.
The second method of lowering your mortgage payment is by refinancing with a lower mortgage rate. This has the added advantage of paying less for your financing over the duration of your loan. These two methods can be combined to further reduce your monthly payment; however, whenever you extend the loan term you will pay more over the life of the new mortgage. You can learn more about your refinancing options, including expensive pitfalls to avoid by registering for a free mortgage video tutorial.