Four Ways to Lower Your Mortgage Payment
Homeowners consider refinancing to lower their mortgage payments for many reasons. Some are experiencing a financial setback. Others want the extra money for investing opportunities, debt consolidation, or they need to move and have a house they can't sell. Still others have a good--though seasonal or sporadic--income. A lower payment helps them smooth out their financial peaks and valleys.
Why Do You Need to Lower Your Mortgage Payment?
The answer to that determines what kind of loan will best help you achieve your goal. For example, if you just retired and will be living on less, you may require a long term solution.
1. Stretch It Out with a Longer Term Refinance. One way to lower your payments is by taking the existing balance and stretching it out over a longer term. For example, if you took a $300,000 mortgage at 7% 5 years ago, your balance is probably about $282,400 and your payment about $1,996. By refinancing to a 6.5% rate and stretching out that balance to 40 years, you could drop your payment by nearly $350 a month.
2. Go Low by Refinancing to an ARM with a Lower Rate. If your objectives are short term, you have more options. Many younger homeowners are fairly confident that their income will increase, and they don't expect to remain in their home more than a few years before trading up. If you just want a lower rate, a hybrid ARM that matches your time frame can be a great option. If you're making that $1,996 payment on your 300k loan at 7% but would prefer to make a $1,505 payment, a 3/1 hybrid at 5.75% would do the trick nicely.
3. How Low Can You Go? Refinance to Option ARMs or Hybrid Loans for Flexibility. If you really want to use your equity to get the lowest possible payment, if for example you're starting a business, an option ARM can be a great solution. It's also effective for buying a bigger house or saving money now, provided you know that you will earn more soon or receive some sort of windfall, like an inheritance or legal settlement. This loan is also nice for those with seasonal or sporadic income because they can make full payments when flush and minimum payments when things are tight.
Keep in mind that this loan can deplete your equity and is not recommended as a long term lifestyle. Option ARMs and hybrid option ARMs can offer minimum payments based on a rate as low as 1.25%. Interest-only options are available as well. Newer products feature safety nets like caps to keep your payment increases to reasonable limits. Your $300,000 loan could have a minimum payment as low as $1,000 a month.
4. Cash in Your Equity to Lower Your Total Payments Your mortgage is only part of the entire financial picture. Taking a cash-out refinance may be the solution to an overwhelmed bank account. Adding $25,000 to a $300,000 mortgage at 7%, for example, might lower your payments by several hundred dollars and lower your overall interest rate on your total debt. And there may be tax savings as well.
Refinancing for Lower Payments Requires Forethought
Obtaining the lowest payment possible can be a valid financial strategy or may be a hard-luck necessity. When choosing a loan, remember that the loan will have to be repaid at some point. Consider the following:
1. What will be done with the money saved each month? Pay extra bills? Invest?
2. How long will the extra money be needed?
3. How do you plan to pay the loan back?
4. What's your backup plan for repaying the loan? Counting on appreciating in the housing markets backfired on homeowners across the country. Make sure you have another option if the market isn't kind to your neighborhood.
A good mortgage professional should be able to work with you and help you sort out these choices and make the most appropriate one for your finances and your lifestyle.