3 Ways to Lower Your Mortgage Payment
If you are having trouble paying your bills every month, you are not alone. Even though the media says we are in recovery mode with the economy ask yourself if your economy is better. I would guess your answer would be “No”. It’s hard to find ways to cut back on expenses. Most family budgets don’t have a lot of wiggle room.
The number one expense all families have is their mortgage or rent payment. It is by far the largest expenditure any family has in their budget. If you are paying rent you can move to a smaller apartment with a smaller rental payment. If you are paying a mortgage it’s a little tougher to reduce that payment but not impossible. Your first thought is, why not refinance your mortgage. But before you go down that road let’s check out some alternatives.
Re-Cast Your Loan
Re-casting your mortgage is just another way of saying re-amortize your loan. If you have a $200,000, 30 year loan at 5% your payment is $1,074. I got this figure using a mortgage-calculator. After three years of making your mortgage payments your principal has dropped to $188,997. It is possible to go to your mortgage lender and ask that the loan be re-cast back to a 30 year term. This would result in a new lower payment of $1,015. A savings of $59 a month. It may be worth asking your lender if they would do this for you. Be ready to pay a fee for this service of at least $250.
If you went the refinance route you would get a reduction in payment that would be a lot more but by re-casting you wouldn’t be paying the new mortgage fees.
Extending Your Mortgage Term
Another way to lower your mortgage payment is to refinance your mortgage and extend the length of the term. If you have a 30 year mortgage now it is possible to refinance and extend the term to 40 years. Your $200,000 mortgage at 5% with a payment of $1,074 can be refinanced to a 40 year term and have a new lower payment of $964. A savings of $110 a month. If that is not enough of a reduction then extend the mortgage term to 50 years in length. Believe it or not lenders are happy to take more of your money for a long amount of time.
This technique does lower your monthly mortgage payment but it also increases your overall costs. With this option you will be paying a lot more interest.
Interest-Only Refinance
A interest only refinance allows you to just pay interest on your mortgage. You do not pay any principle. With this option you are getting a lower monthly payment. There are many ways this can be done to suit your needs. You can have the interest only payment schedule only go on for a certain number of years. Afterward the payment would increase because you would now have some principle added to the payment. This can work for people who have a need for a lower payment at the present time but know there finances will improve in the future and will be able to meet the larger payment at a time in the future.
Here again, another way to reduce your monthly mortgage payment through a refinance. But with the lower payment you are also increasing the total amount the loan is costing you. You are definitely paying much more interest.
The Best Way to Lower Your Payment
All these ways I have described to lower your mortgage payment, do work. But they also increase the overall cost of your mortgage. The best way to lower your payment and reduce the overall cost of the mortgage is to refinance to a lower interest rate.
Your $200,000 loan with a 5% interest rate has a payment of $1,074. Refinancing to a lower rate of 4%, your payment drops to $955. A savings of $119 a month. With the lower payment you are also paying less interest. This reduces the overall cost of your loan. Over the life of the mortgage you are saving over $40,000 in interest. Plus you get to keep $42,840 that you would of paid to the lender in mortgage payments.
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Category: Mortgage
