The main ways to reduce what you owe each month

You can lower your mortgage payment by refinancing to a new loan with a lower interest rate, extending the loan term to spread payments over more years, making a lump-sum payment toward principal, or switching from an adjustable-rate mortgage to a fixed rate if rates have dropped. Some people also remove private mortgage insurance (PMI) once they have enough equity, which cuts the monthly bill. The fastest option is usually refinancing, but it costs money upfront and takes 30 to 45 days. Extending your term lowers the monthly amount but means you pay interest for longer.

Not every option works for every person. If your credit score has dropped since you took out the original loan, refinancing may not save you money. If you are already near the end of your loan term, extending it may not be worth the refinancing costs. If you have less than 20 percent equity, you may not be able to remove PMI yet. The right move depends on your current loan terms, how long you plan to stay in the home, and what your credit and finances look like now.

Key Takeaways

  • Refinancing replaces your old loan with a new one at a lower rate, but costs between 2 and 5 percent of the loan amount in closing costs and takes 30 to 45 days to complete.
  • Extending your loan term from 30 years to 40 years lowers your monthly payment but increases the total interest you pay over the life of the loan.
  • Removing PMI once you reach 20 percent equity can save $100 to $300 per month, depending on your loan size and original down payment.
  • Making a single large payment toward principal reduces the amount owed and can lower future payments if you refinance, but does not automatically reduce your monthly bill.
  • Your credit score, current interest rate, and how long you plan to stay in the home all affect whether a lower payment is actually possible and worth the cost.

Refinancing to a lower interest rate

Refinancing means taking out a new mortgage to pay off the old one. If current rates are lower than your original rate, your new payment will be lower—assuming you keep the same loan term. For example, if you borrowed $300,000 at 6 percent over 30 years, your payment is roughly $1,799 per month. If rates drop to 5 percent and you refinance for the remaining balance over the same 25 years left on your loan, your new payment drops to around $1,580.

Refinancing costs money upfront. Closing costs typically run 2 to 5 percent of the loan amount—$6,000 to $15,000 on a $300,000 loan. You pay these costs when you close the new loan, and they can be rolled into the new loan balance or paid in cash. The lender will give you a Loan Estimate within three business days of your application, which shows the interest rate, monthly payment, and all closing costs. Use this to calculate your break-even point: divide the closing costs by your monthly savings. If closing costs are $9,000 and you save $200 per month, you break even in 45 months. If you plan to sell or refinance again before that, the savings may not justify the cost.

Your credit score affects the rate you receive. If your score has dropped since your original loan, you may not may have access to for a lower rate—or the rate offered may be only slightly lower than what you have now. Check your credit report before applying and dispute any errors. Lenders also look at your debt-to-income ratio, employment history, and how much equity you have in the home.

Extending your loan term

When you refinance, you can choose a new term. Extending from 30 years to 40 years spreads your payments over a longer period, which lowers the monthly amount. Using the same example: refinancing $300,000 at 5 percent over 40 years instead of 25 years drops your payment from $1,580 to $1,432 per month—a savings of $148.

The trade-off is that you pay significantly more interest over the life of the loan. On a $300,000 loan at 5 percent, the total interest paid over 25 years is roughly $237,000. Over 40 years, it rises to about $314,000—an extra $77,000 in interest. This strategy makes sense if you need to free up cash flow now and plan to stay in the home long enough to justify the extra interest, or if you expect your income to rise later and can pay it off faster than the extended term requires.

Some lenders offer 40-year mortgages, but they are less common than 30-year loans. You may also see 25-year or 20-year options. Ask your lender what terms they offer and request a comparison showing the monthly payment and total interest for each option.

Removing private mortgage insurance (PMI)

If you put down less than 20 percent when you bought the home, your lender required PMI to protect themselves if you default. PMI typically costs 0.5 to 1.5 percent of the loan amount per year, added to your monthly payment. On a $300,000 loan, that is $125 to $375 per month.

Once you have paid down the loan to 80 percent of the home's original purchase price, you can request removal of PMI. For example, if you bought for $300,000 and borrowed $270,000 (10 percent down), you can remove PMI once the loan balance drops to $240,000. You do not have to wait for the lender to remove it automatically—you can request it in writing once you hit that threshold. Some lenders remove it automatically at 78 percent loan-to-value, but do not count on it.

To remove PMI, contact your loan servicer and provide proof of the current home value if the home has appreciated significantly. If the home is worth more than the purchase price, your equity may already exceed 20 percent even if the loan balance is higher. You may need a home appraisal, which costs $300 to $500, but the monthly savings usually justify it. Once PMI is removed, your payment drops immediately.

Making a lump-sum principal payment

Paying a large amount toward principal reduces the loan balance and the total interest you will pay over time. However, it does not automatically lower your monthly payment unless you refinance afterward. If you have $10,000 to put toward your mortgage, you can either pay it as a lump sum (which reduces what you owe but keeps your payment the same) or use it to refinance and lower your payment.

A lump-sum payment makes sense if you want to pay off the loan faster without the cost and hassle of refinancing. It also reduces the total interest paid. On a $300,000 loan at 5 percent over 30 years, paying an extra $10,000 toward principal saves roughly $18,000 in interest and shortens the loan by about two years. However, if your goal is to lower your monthly payment, refinancing after making the payment will give you a bigger reduction than the payment alone.

Before making a large principal payment, check your loan documents for prepayment penalties. Most mortgages do not have them, but some do, especially if you have an older loan or a non-standard mortgage. If there is a penalty, it may erase the savings from paying extra principal.

Switching from an adjustable-rate mortgage to a fixed rate

If you have an adjustable-rate mortgage (ARM), your interest rate is fixed for an initial period—often 3, 5, 7, or 10 years—then adjusts annually based on market rates. When the rate adjusts upward, your payment rises. If rates have dropped since you took out your ARM, refinancing to a fixed-rate mortgage can lock in a lower rate and a stable payment for the rest of the loan.

This strategy only works if current fixed rates are lower than your ARM's current rate or what it will adjust to. If your ARM is still in its fixed period and rates have not changed much, refinancing may not save you money after closing costs. However, if your ARM is about to adjust and rates are higher than your current rate, refinancing to a fixed rate protects you from future increases.

Ask your lender for an ARM disclosure statement, which shows your current rate, the adjustment date, and the margin and index used to calculate future rates. This helps you estimate what your payment could be after the adjustment and decide whether refinancing now makes sense.

When a lower payment is not possible

If interest rates have risen since you took out your loan, refinancing will not lower your payment—it will raise it. In this case, your only options are extending the loan term (which lowers the payment but costs more in interest) or making extra principal payments to reduce what you owe faster.

If you are already near the end of your loan term, refinancing may not be worth the closing costs. For example, if you have 5 years left on a 30-year loan and you refinance for another 30 years, you extend your payoff date by 25 years and pay far more in interest, even if the rate is lower. In this situation, it may be better to keep your current payment and pay off the loan on schedule.

If your credit score has dropped or your income has declined, you may not may have access to for a refinance at all, or you may only may have access to at a higher rate than your current one. In this case, focus on removing PMI if you have it, or making extra principal payments if you can afford them.

Frequently Asked Questions

How long does it take to refinance and see a lower payment?

Refinancing typically takes 30 to 45 days from application to closing. You will see the lower payment on your first bill after the new loan closes. During the refinancing process, you continue making payments on your old loan as usual.

Will refinancing hurt my credit score?

Refinancing causes a small, temporary dip in your credit score because the lender pulls a hard inquiry and opens a new account. The dip usually recovers within a few months. The benefit of a lower payment and interest rate typically outweighs this temporary impact.

Can I lower my payment without refinancing?

Yes. Removing PMI (if you have it) and making extra principal payments both lower your long-term costs. Removing PMI cuts your monthly payment immediately. Extra principal payments reduce the loan balance and total interest but do not change your monthly payment unless you refinance.

What if I have an underwater mortgage (owe more than the home is worth)?

Refinancing is difficult if you are underwater because lenders want at least 20 percent equity. You may be able to refinance through a government program like HARP (Home Affordable Refinance Program) if you have a Fannie Mae or Freddie Mac loan, but these programs have specific requirements. Contact your loan servicer to ask what options are available.

Should I pay closing costs upfront or roll them into the new loan?

Rolling closing costs into the loan means you pay interest on them for the rest of the loan, which costs more overall. Paying them upfront saves money but requires cash on hand. If you do not have the cash, rolling them in is better than not refinancing at all—just factor the extra interest into your break-even calculation.