Dear Dr. Don,
Our family has been in our house for six years. We have a $258,000 mortgage with monthly payments of $2,150. What's different is that our mortgage is interest-only until September of this year, with a rate of 5.75 percent. Is there anything we can do to reduce our monthly payment?
-- Denise Diminish
Since the interest-only component of the monthly mortgage payment is a little more than $1,200, you are paying about $900 a month in taxes, insurance and possibly private mortgage insurance, or PMI, in that monthly payment.
It would be common for the interest-only payment to convert to an amortized payment at the initial interest rate reset in September. That should mean you will see higher payments, because it will include principal repayments over the remaining term, even if the interest rate reset gives you a lower mortgage rate.
The way I see it, there are at least two ways to lower your monthly mortgage payment. You can reduce your interest rate and possibly lengthen your loan term. Another way would be to refinance into another interest-only loan. I wouldn't, however, recommend a second interest-only loan, especially if you plan to remain in the house for a while. The risk is that you'll be hit with higher rates down the road if you failed to lock in.
I'm presuming you have sufficient income, credit scores and equity in your home to refinance. If you're "underwater" in your mortgage, you should look into whether you qualify for the federal government's Home Affordable Refinance Program, also known as HARP.
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