Why A Lower Mortgage Payment Might Not Help

Why A Lower Mortgage Payment Might Not Help

February 20, 2020
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Why A Lower Mortgage Payment Might Not Help

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A lower mortgage payment can help reach your monthly financial goals, but it doesn't come without its drawbacks.

If you're considering a lower mortgage payment to help with monthly bills, be sure to understand the drawbacks that come along with it. In 2020, record-low mortgage rates led to a surge in refinancing. Despite this fact, a recent Bankrate survey shows that many homeowners have not considered getting a new loan.

It's tempting to focus solely on the lower payment, but saving money in the short-term may lead to greater interest paid throughout the life of your loan, as well as extending the length of your mortgage (the loan term).

Let's take a closer look at why lowering your mortgage may not be the best choice.

What Are The Drawbacks of Refinancing?

For anyone wondering how to get a lower mortgage payment, one way you've most likely heard of is refinancing.

Refinancing an existing mortgage means you'll take out a new mortgage, possibly lower your interest rate, take out additional funds (a cash out refinance), and change the length of your loan.

If you've suddenly found yourself struggling to pay your monthly mortgage, refinancing may seem like an easy solution. But be careful—when refinancing, you are able to lower your payments, but not without a price.

Closing Costs When Refinancing

Closing costs will factor into play and are an additional cost you are likely to incur, especially if your mortgage lender has high costs associated with refinancing. While there may be no-cost loans available, you may find yourself with a higher interest rate, especially if your credit score isn't excellent.

There are many of the same fees accompanied with refinancing your mortgage that you paid when you first purchased your home. For example, you may need to again pay for title insurance and origination fees. There may also be application fees to take into consideration.

A good rule of thumb is to expect to pay between 2-6% of what you borrow when refinancing.

Overall Savings

If you are unable to break even after refinancing, then it may not be a good option for you.

How much did you pay in closing costs? How long will it take you to recoup that money from a lower interest rate?

If it takes longer than five years for you to reach the break even point after refinancing, then it may not be worth it. Much of the time, homeowners move after 5-7 years in one home. As a result, you'll have lost the fees you paid when relocating.

Preserving Home Equity

Equity in a home is the amount of interest a homeowner has. If your property value increases, so does your equity. As you pay down your mortgage, your equity increases.

However, when you refinance your home loan, you can choose to lump closing costs into your new mortgage payment (or pay them out-of-pocket), which reduces the amount of equity you have in your home.

If you think you may put your house on the market in a fairly short amount of time, then refinancing your mortgage would be doing you a disservice.

A Lower Mortgage Payment May Not Be Worth the Risk

If you're considering a lower mortgage payment, but need to finance in closing costs or are planning on moving in a few years, then you may be doing more harm than good.

You will lose equity in your home, something extremely valuable when purchasing your next home.

There are many other cost-effective ways to lower your monthly finances, all while preserving the integrity of your mortgage.

Explore our information on choosing the best mortgage loan for your home, and prepare yourself for the future so you don't have to worry about refinancing.