Lower Home Mortgage Payments With The Best New Loan and Refinance Rates

Mortgage rates are ridiculously low nowadays thanks to significant federal government policies to combat the Coronavirus/COVID-19 economic fallout. Coupled with mild inflation and already low interest rates thanks to federal reserve actions to keep markets liquid (i.e quantitative easing) we can expect low interest rates for several more years. While this is not great news for your savings it is great news if you are getting a new mortgage or just looking to refinance and lower your monthly payments.

Like any major financial decision though you want to shop around to get the best rates, lowest closing costs and great customer service. You will also find a loan type comparison table which hopefully makes your search for the right mortgage easier!

Loan Type Comparisons - Which Mortgage Option is Best For You

Loan TypeKey CharecteristcsProsCons
Fixed-rate mortgages (15yr or 30yr)The interest rate remains the same for the life of the mortgage, which means the monthly principal and interest payments never change.Straightforward, simple and the most popular mortgage type. Accounted for 90% of mortgages since 2010Borrowers pay a premium for consistency so normally not the lowest rate relative to other financing options. Eg. Normally 1% higher than equivalent ARM.
Adjustable-rate mortgages (ARMs)Generally start with a fixed interest rate for three to 10 years before the rate begins to adjust annually.Comparatively low initial interest rates

ARMs can be a better bet for borrowers who plan to sell their home before the fixed-interest period ends.
ARMs are considered riskier than fixed-rate loans because the interest-rate adjustments can push borrowers' monthly payments up by hundreds of dollars or more, depending on the size of the loan and the change in the interest rate.

borrowers should find out how its interest rate can change over the life of the loan. In most cases, the interest rate on such a five-year ARM can increase or decrease by as much as five percentage points over the life of the loan.
Interest-Only MortgagesFor a set period—often five to 10 years—the borrower doesn't have to pay down the principal. Some carry fixed interest rates, but most are ARMs, so the rate can then fluctuate.The interest-only feature can result in tens of thousands of dollars in savings, at least initially. On a 30-year $800,000 mortgage with a 3.2% interest rate that is fixed for the first five years—typical for this type of loan—interest-only payments would be about $2,153. If a borrower signed up for a similar loan without an interest-only feature, the monthly payment would be about $3,364.

Interest-only mortgages became popular before the housing bust because they allowed people to afford more expensive houses. But many borrowers were unable to keep up with the loans once their monthly payments increased, and their homes ended up in foreclosure.

The loans can help borrowers who get much of their income through bonuses or other lump sums by limiting their monthly outlay
But there are downsides. Borrowers aren't building up any equity, for example, and if home prices drop, they could end up owing more than they can get by selling the house, depending on the size of their down payment. Minimum down payments vary by lender, though some lenders require at least 20%.

In addition, when the interest-only period ends, borrowers must be ready to make principal and interest payments or risk foreclosure. The size of this new monthly payment will vary depending in part on the length of the repayment period that remains.
Piggyback Loans (home-equity loans or home-equity lines of credit to pay)Borrowers typically sign up for home-equity loans or home-equity lines of credit to pay for renovations and other expenses. But they are also being offered to borrowers who can only make small down payments.Provides quick short term financing if cash is tight using your existing home equity as collateralBorrowers need to keep up with all the home loans or risk foreclosure, even if they are current on the primary mortgage. Home-equity loans typically must be repaid in 10 years, so monthly payments on that portion of the deal can be large.

Home buyers also should consider the risk that they could end up owing more on their home than it is worth if home prices decline, given their small down payment.

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2 thoughts on “Lower Home Mortgage Payments With The Best New Loan and Refinance Rates”

  1. I was wondering what you thought of the following refinance scenario:
    I live in California and over-paid for my house in late 2006. We paid $1,050,000. It’s a beautiful house with tons of upgrades, nice front and back yard, etc. We owe $890,000. It’s worth about $850,000. In order to get to the 80% loan to value, we are planning on reducing the principal by paying off the 2nd mortgage ($90,000) with a combination of 401k loan and gift from grandparents. My husband and I own the place together, we both have excellent credit and excellent income. We currently pay $6k a month, not including taxes. Our goal is to get it closer to $4k a month not including taxes. Does it make sense to pay down that 2nd to save $2k a month?

    • Great question. I am bit hesitant of recommending using your 401K to pay down your loan, but if you are in a strong position to repay the loan then the numbers may make sense. Fewer outlays now (=more disposable income) may be better now based on your financial situation.

      The other thing to consider is your interest rates vs return you are getting from your 401K. By taking out a loan you are not earning any money on your 401K, but since the interest rate on your second loan is probably higher than your 401K return, paying it down could be a better investment in the short run.

      I would also consider a refinance, since you both have good credit. You could have lower monthly payments that way as well, without needing to touch your 401K.

      At the end of the day, do the math. If you are able to repay your 401K loan for sure AND get a much lower monthly payment then your strategy may be a good one.


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