Refinancing to Lower Your Monthly Payments
Lowering your your monthly mortgage payment can have a positive impact on your budget. But before you decide if refinancing is the right choice for you, take a look at some of the details.
Potential benefits of lowering your payments
Lowering your monthly mortgage payment by refinancing to a lower rateFootnote 1
or extending your loan termFootnote 2
can make it easier to pay your mortgage on time every month, while also possibly covering your other debts and expenses. And if you are concerned about your ability to make your current mortgage payments in the future, lowering your payments now can help relieve that pressure.
Whenever you refinance, you’ll be responsible for paying closing costs
. In addition, it’s common to refinance into another mortgage of the same term
, typically another 30-year mortgage, which means you’d be restarting another 30-year mortgage after you’ve already owned your home for a number of years. As a result, you’d probably pay more in interest over the life of the loan. So while your monthly mortgage payments would decrease, your total costs over the long term would likely increase. It’s important to discuss your situation with your lender to make sure you’re comfortable with how these costs will impact your overall financial picture.
Your breakeven point
The breakeven point
is how long it takes for a reduction in your monthly payments to equal the costs of refinancing. If you plan to sell your home before the breakeven point is reached, you probably would not recover these closing costs.
$5,000 in closing costs ÷ $200 in monthly payment savings = 25 months to break even
Accomplishing your other goals
If you choose to refinance to lower your monthly payments, you may also have the opportunity to make additional changes to your loan at the same time. Depending on your circumstances, you may also be able to switch to a fixed-rate mortgage
or borrow from a portion of your available home equity. Talk to your lender about what you’d like to accomplish and see what’s achievable for your situation.