Short On Cash Every Month? It's Time To Refinance!

After faithfully paying your mortgage for years, now is the time to make your mortgage work for you. If you want to reduce your monthly financial obligations, refinancing your mortgage can help you accomplish this financial goal. Depending on your mortgage and personal situation, there are a few ways that refinancing can reduce your mortgage payment. 

1. Refinance into a loan with a longer term.  If you refinance your mortgage into a product with a term that is longer than the amount of time left on your mortgage, this lowers your payment. For example, if you initially took out a 30-year mortgage for $200,000 at 5 percent interest, after 10 years, your balance is $162,288.34. Your principle and interest payment for this mortgage is $1,073.64 each month.

Refinancing into another 30-year loan spreads the remaining balance out over 30 years instead of 20 years and results in a smaller monthly payment. By refinancing your mortgage balance into another 30-year mortgage, your payment is now $871.20 a month, approximately $200 less than you previous payment.

2. Take advantage of lower interest rates. 

If interest rates have dropped, you can refinance your mortgage to take advantage of these lower rates. Let's assume that you are 15 years into a 30-year mortgage and still owe $123,907. Your mortgage has an interest rate of 6 percent, and your monthly payment is $1,049.21. Homeowners who do not want to 'start their mortgage over' can utilize loan options that permit them to pay their home off in the same amount of time. By refinancing the balance of $123,907 into a 15-year mortgage with an interest rate of 4 percent, your payment drops to $916,53. You can easily save more than $100 every month and pay off your home in the same amount of time.

3. Eliminate mortgage insurance. 

If you purchased a home with a down payment that was less than 20 percent of your home's purchase price, your loan likely has private mortgage insurance (PMI). Though PMI automatically comes off once you have paid your loan down to 78 percent of your original balance, you can get rid of it sooner if your home has appreciated in value. Your current mortgage does not take appreciation into account when calculating your PMI.

Refinancing lets you utilize this additional equity and remove PMI. PMI rates vary between 0.3 percent and 1.2 percent of your loan amount. It is recalculated every year based on the amount of your mortgage. If your PMI rate is 1 percent and your mortgage balance is $150,000, this results in an annual expense of $1,500 or $125 every month. Use your equity to get rid of this unnecessary expense.

If you are experiencing cash flow problems, it is time to take action. By refinancing your mortgage, you can reduce your fixed monthly expenses. Whether you get rid of PMI, obtain a lower interest rate, or increase your loan's term, refinancing is viable way to lower your mortgage payment.