How
to lower your mortgage payment
If your financial circumstances have changed or you need to
free up money for other purposes, you may want to consider
refinancing your mortgage to lower your monthly payment. Of
course, it’s important to weigh both the benefits and the
risks.
Benefits
Perhaps you have an adjustable rate mortgage that will
“reset?in the next few months to a higher rate, and
continue to adjust every year. Or maybe today’s interest rates
are lower than they were at the time when you took out your
mortgage. Refinancing may enable you to lock in better rate. Or
maybe at the time you got your loan you were more optimistic
than you should have been about how quickly you could afford to
pay it off. Extending the term of the loan and paying it off
more slowly could also reduce the amount you have to pay each
month.
Risks
While you can save in the short-term by reducing your monthly
payments, you may pay more in interest payments over the
long-term if you extend your loan term and pay your mortgage off
more slowly. There may also be financial penalties associated
with a mortgage refinancing. Find out if there are, and whether
the gain on the refinancing is greater than the cost.
Consider the following:
Extending the term
If you extend the term of a $100,000 mortgage at 6.25 percent
interest from 15 years to 20 years, you could reduce your
monthly payments by $126.49. But you will also end up paying an
extra $21,086 in interest charges. Only you can decide if
that’s an appropriate trade-off.
| Mortgage amount |
$100,000 |
$100,000 |
| Term |
15 years |
20 years |
| Interest rate |
6.25% |
6.25% |
| Monthly payment |
$857.42 |
$730.93 |
| Total cost |
$154,336 |
$175,422 |
| Total interest cost |
$54,336 |
$75,422 |
Lowering the interest rate
In the case of a $100,000 mortgage amortized over 30 years, you
could reduce your monthly payments by $47.91 by refinancing from
a 6.25 percent interest rate to a 5.5 percent interest rate.
Plus, you’ll save $17,253 in interest charges over the life of
the loan.
| Mortgage amount |
$100,000 |
$100,000 |
| Term |
30 years |
30 years |
| Interest rate |
6.25% |
5.5% |
| Monthly payment |
$615.72 |
$567.79 |
| Total cost |
$221,656 |
$204,403 |
| Total interest cost |
$121,656 |
$104,403 |
Combining options
It may be possible to opt to change both the term and the
interest rate of your mortgage in order to lower the payment.
Start by finding or negotiating the lowest possible interest
rate, then calculate the term that brings your payment to a
level that is acceptable to you.
Arranging a payment holiday
Some mortgages allow you to take a payment holiday. If your
financial bind is likely to be only short-term, ask your lender
if you can arrange a temporary suspension of payments.
Refinancing with an interest-only mortgage
You can reduce your monthly payments to the least possible
amount by refinancing with an interest-only mortgage. The
downside is that when the typical five- or 10-year interest-only
period expires, your payments will increase considerably. In
fact, they will be higher than they would have been if you had
stayed with a conventional mortgage. This option is therefore
only worth considering if you are experiencing a temporary
financial squeeze but expect your financial situation to improve
significantly in the future.
Downsizing your home
Did the thrill of the house hunt lead you to overextend yourself
or be overly optimistic when it came to your finances?
Realistically assess your finances and consider whether you can
do with a smaller house. A more financially appropriate home may
be in order.
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