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So, you bought a house, took out a mortgage, and agreed to a monthly payment. At the time, you were excited that you were able to qualify for a mortgage, and were confident that you could keep up with the monthly payments, even if the Interest Rate wasn’t the best. After all, unlike rent, every payment you make adds to your equity in the home. You’re making an investment, rather than simply paying someone else for the privilege of living on their property.
Years go by, and life happens. You find yourself hard-pressed for cash. That monthly payment begins to loom. Is there any way to lower that payment?
Thankfully, there is. It’s called Refinancing. Refinancing is taking out a new mortgage at the price of what you currently owe, rather than the house’s original value. So if you bought a $200,000 house with a 30-year mortgage, then paid off $100,000 of it, you could get a new 30-year mortgage on just the $100,000 you have left. You use this new Mortgage to pay off the old and now enjoy a lower monthly payment.
However, just because there’s a lower payment, doesn’t mean you’re spending less money. That’s dependent on your Interest Rate.
Interest is the money you are paying the bank for the privilege of using their money to buy the house. It doesn’t add equity to your house. The less interest you can pay, the quicker you pay off your house, and the less money you spend in the long run.
If your circumstances (credit, debt-to-income ratio, etc) weren’t perfect when you bought the house, and you’ve spent the last number of years fixing that, then it’s likely your new Interest Rate would be much lower than the old one. In that case, Refinancing could help you save a lot of money, even if you don’t want to increase the length of the mortgage. Dropping the Interest Rate even a few points could save you tens of thousands of dollars over a number of years.
However, if you find your credit has slipped since signing the first mortgage, refinancing could cost you a lot more. You could still save monthly by getting a new mortgage over a longer-term, but in the long run, you will wind up paying those tens of thousands, rather than saving them.
In the end, the best thing to do would be to talk to your lender and see what your new interest rate would be. If it’s better, seriously consider refinancing, even if you don’t extend the length of the loan. All it can do is save you money. If the Interest Rate is higher, you can still refinance and get a lower payment if you desperately need the money, but be prepared to continue paying for a much longer-term, and to potentially pay much more than you were originally supposed to.