Apr 05 2022

How to Lower Your Monthly Payment by Refinancing

Are you struggling with high monthly mortgage payments? Let’s look at the options you have for monthly savings.

Are you struggling with high monthly mortgage payments? Maybe you’d just like some extra cash to spend each month. Then you should know that there are some simple ways to cut your monthly costs through mortgage refinancing. And with today’s attractive interest rates, refinancing may make sense more now than ever. Let’s look at the options you have for monthly savings. 

When Refinancing Makes Financial Sense 

As a rule of thumb, if you can lower your current interest rate between 0.5% and 1%, then refinancing your mortgage usually makes sense. Does a 1% reduction really make that much of a difference? Yes. Let’s take a hypothetical existing 30-year mortgage for $225,000 with a fixed rate of 4%. Then refinanced at 3% after three years. Just calculating by interest and principal, the monthly payment at 4% would be $1,074 and after refinancing at 3%, it would be $846. That’s a difference of $228 per month, or an annual savings of $2,736. 

Monthly Savings with Mortgage Length 

Beyond simply getting a new interest rate on your mortgage, you may also consider lengthening the term when you refinance; by going from a 15-year mortgage to a 30-year one, you can significantly lower your monthly payments. It makes sense if you plan to stay in your home for a while. And consider that the savings don’t have to be just cash in pocket — you could invest that money. For example, earning, say, 8% interest by investing that monthly savings nicely offsets the lower rate of interest you pay on the refinance loan. 

What about rising interest rates? 

Yes, the historically low interest rates we’ve seen in the recent past have been going up; the rise was inevitable. And you may look at these increases and assume that refinancing won’t help you save money, or at least not enough money to make the effort worthwhile. But that’s simply not true for millions of Americans who, indeed, would benefit from refinancing.  

Recent findings from Black Knight show that close to four million homeowners in the United States would be able to lower their monthly payments by refinancing their mortgages. The data and analytics firm identifies prime candidates for refinancing as homeowners who have 30-year fixed-rate mortgages, loan-to-value ratios that are less than 80%, with credit scores of 720 and higher. These homeowners should be able to cut 0.75% or more in interest on their mortgage loans. 

It’s worth noting that the conditions for refinancing approval that Black Knight cites may be stricter than those of some lenders. With more lenient prerequisites, the number of borrowers who could reduce their monthly mortgage payments through refinancing jumps to nearly seven million people, according to Black Knight. 

Figure Out When the Savings Really Start 

If you are thinking about refinancing, you’ll want to determine your break-even point, when the costs of the new loan are surpassed by the savings. These refinancing costs are often anywhere from 2% to 5% of the loan’s total amount. Say, for example, that refinancing reduces your monthly payments by $100 and you paid $5,000 in closing costs. It will take 50 months (just over four years) to recoup the closing costs: that’s your break-even point when the saving begins. 

Save With VA Streamline Refinancing 

If you’ve already qualified for a VA Loan, you know it comes with big benefits, such as no down payment and no private mortgage insurance. But there’s another plus: an Interest Rate Reduction Refinance Loan, or IRRRL. Commonly called VA streamline refinancing, an IRRL is similar to refinancing for conventional mortgage loans. But with fewer restrictions than there are with other types of refinancing. 

There’s a reason they call it “streamlined” — the road to approval is generally smooth with few obstacles. With a VA IRRRL, there’s no need to get an appraisal as you do with some other refinancing programs, and there’s often no need for a credit check, as credit underwriting packages aren’t required by IRRRLs. So even if your credit has taken a few hits since initially getting approved for your VA Loan, approval for an IRRRL is still possible. Plus, the funding fee and the closing costs of the refinancing can get rolled into the mortgage. 

Steps to Take Right Now 

As you approach refinancing, you might consider these first financial steps to get yourself prepared. 

  • Make a goal. Are you looking to move from an adjustable-rate to a fixed-rate mortgage? Or go from an FHA mortgage to a conventional loan? Beyond saving money each month, what you wish to achieve through refinancing should be clear from the start.  
  • Determine your home’s equity. Your lender will look at your home equity during the approval process, so you should, too. The more equity you have in your home, the less of a risk you are to lenders, and the better your refinancing terms may ultimately be. To figure out your equity, first determine your home’s market value; an online home value estimator will get you close. Subtract what you owe on your mortgage from that amount to determine your equity. If you have more than 20% equity, you’re well-positioned for refinancing. 
  • Check your credit report. Lenders almost always look at credit scores in evaluating applications for refinancing, so you don’t want any surprises. You can get a free credit report from the credit reporting agencies TransUnion, Equifax, and Experian. And know that you have the right to contest any errors you may find. 
  • Gather the needed paperwork. Your lender is going to want some financial information from you, so make sure you have the paperwork for your current mortgage. You’ll want to get your W-2s from the past two years, and your most recent pay stubs, or bank statements if you are self-employed or have non-traditional income. 

Whether you stick with your loan’s current length, or stretch things out to pay less each month, City Lending is here with a range of refinancing programs that could very well lower your monthly payments. 

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