How to Cut Your House Payment When Refinancing

••• Jupiterimages/liquidlibrary/Getty Images

Many homeowners decide to refinance their mortgage loans as a way to cut house payments. Lower mortgage rates offer a practical option for saving money on what is one of most people’s biggest monthly expenses. Refinancing often makes sense but cautions that while the transaction restructures the terms of your mortgage loan, it doesn’t pay it off. Since some homeowners extend repayment of the outstanding principal for more than the number of years remaining on the original note, refinance keeps them in debt longer.

Improve your credit profile before applying for a refinance loan. You must have a FICO credit score in the mid-700s or better to qualify for the lowest rates, according to Myfico. Qualifying for an interest rate just a few percentage points lower than what you pay now can potentially save you thousands of dollars in payments each year.

Compare what different lenders have to offer to find the best deal. Mortgage rates vary widely among lenders so take the time to research the many options available. MSN Real Estate reports that lender rates can vary by 1 percent or more, according to On a $250,000 loan, that difference could cut your monthly payment by about $140. The interest rate a mortgage lender will offer you on a refinance loan will also depend on your credit score, debt-to-income ratio, income and how much equity you have in your home.

Negotiate with a lender you know. If you’ve been a loyal customer for several years and have assets in that bank, you could get a better deal. Hometown lenders and credit unions often have more flexible underwriting standards than large national mortgage lenders. A local lender may be willing to offer you favorable terms based on your reputation.

Extend the loan over a longer term. This will lower your monthly payments but the loan will cost you more in the end. You’ll pay more because the interest accrues over a longer repayment period. The monthly payment on a shorter-term loan is higher but more of the money is applied against the principal each month allowing you to pay off the debt sooner.

Consider an adjustable-rate mortgage. An ARM with a short adjustment period offers the lowest interest rate, notes ARMs that adjust annually or every three or five years come with the lowest rates. But even an ARM that doesn’t adjust for 10 years generally offers a lower rate than a fixed-rate loan. Be clear on the periodic rate adjustment dates and caps and lifetime cap before closing on the loan.

Refinance to a smaller mortgage. Owing a lower principal balance will reduce your monthly payments. A cash-in refinance loan requires that you pay the difference in cash at the time you refinance. It's a way to increase home equity if you have less than 20 percent -- the minimum amount many lenders require to refinance a mortgage loan, points out MSN Real Estate. Even if you made a 20 percent down payment when you took out the original mortgage, your home may have depreciated in value since then.