Refinancing to lower your monthly payment

If your mortgage payment is feeling a little too hefty every month — either because your financial situation has changed or you took on too much when you signed the dotted line — refinancing can potentially lower your monthly burden. But it requires the right circumstances to be a good solution.

The most obvious opportunity is when current rates are lower than your existing APR. A common rule of thumb is that refinancing to at least a half percentage point below your current rate can be cost effective, and a lower rate means lower payments.

If a sufficient rate reduction isn’t in the cards, but you’ve acquired an inheritance, a large bonus or another windfall, you can lower your bill by refinancing with a bigger down payment. By applying your windfall to the new mortgage, you convert the cash to home equity and can refinance a lower amount.

You can also reduce your payment by refinancing to a longer loan or an interest-only mortgage. These are better left as last resorts, though, since they’ll either stretch out how long you’re on the hook for a mortgage or leave you in worse financial shape in the end. But if you’re in dire straits to make ends meet, it’s an option that may keep you out of hotter water.

Note that if you’re currently paying private mortgage insurance and have built up at least 20 percent equity, refinancing isn’t necessary to lower your payments. Simply contact your lender to request the PMI charges be terminated.

In all cases, refinancing will require having a decent credit score. And if you’re several years into your current mortgage, refinancing can add years to your repayment period, which may not be desirable. As always, research the costs and trade-offs carefully to decide your own best option.