The main ways to reduce what you pay each month

You can lower your mortgage payment by refinancing to a lower interest rate, extending the loan term, removing private mortgage insurance (PMI), making a lump-sum payment toward principal, or switching from an adjustable-rate mortgage (ARM) to a fixed rate before rates climb. Not all of these work for every situation—refinancing costs money upfront, extending the term means paying interest longer, and some require you to have built equity or improved your credit score since you took out the original loan.

The fastest option is often removing PMI if you've paid down your loan to 80 percent of the home's original value. The cheapest option depends on your current rate, how long you plan to stay in the home, and what your lender will allow. A mortgage servicer can tell you in one conversation whether you're close to PMI removal or whether refinancing makes financial sense for your situation.

Key Takeaways

  • Refinancing to a lower rate reduces your monthly payment but costs 2 to 5 percent of the loan amount upfront, so you need to stay in the home long enough to recoup those costs.
  • Extending your loan term from 15 years to 30 years lowers the monthly payment but increases total interest paid over the life of the loan.
  • PMI removal happens automatically once you reach 80 percent loan-to-value, or you can request it sooner if your home has gained value or your credit has improved.
  • Making a single large payment toward principal reduces the amount you owe and the interest calculated on future payments, but does not change the monthly payment unless you refinance afterward.
  • If you have an ARM, switching to a fixed rate before the rate adjusts upward can lock in a lower payment, though this requires refinancing and its associated costs.

Refinancing to a lower interest rate

Refinancing means taking out a new loan to pay off your existing mortgage. If current rates are lower than your original rate, your new monthly payment will be lower—even if you keep the same loan term. The catch is that refinancing costs money: lender fees, appraisal fees, title insurance, and other closing costs typically run 2 to 5 percent of the loan amount. On a $300,000 loan, that's $6,000 to $15,000 out of pocket.

To know whether refinancing makes sense, calculate your break-even point. Divide the total closing costs by the monthly savings. If closing costs are $8,000 and your new payment is $200 lower per month, you break even after 40 months (about 3.3 years). If you plan to sell or refinance again before that point, refinancing now costs you money. If you plan to stay longer, you come out ahead.

Your lender will order an appraisal to confirm your home's current value. If the home has lost value since you bought it, you may owe more than it's worth, and some lenders will not refinance in that situation. If the home has gained value, you have more options and may may have access to for better rates.

Extending your loan term

Stretching a 15-year mortgage into a 30-year mortgage cuts your monthly payment roughly in half because you're spreading the remaining balance over twice as many payments. This is the most direct way to lower the payment immediately, and it does not require a rate drop or an appraisal.

The trade-off is steep: you pay far more interest over the life of the loan. On a remaining balance of $200,000 at 5 percent interest, a 15-year payment is about $1,420 per month; a 30-year payment is about $1,070. Over 30 years, you pay roughly $185,000 in interest instead of $55,000. You're paying an extra $130,000 to save $350 per month.

This option makes sense if you're in genuine financial hardship and need breathing room now, or if you're confident your income will rise and you can make larger payments later. It makes less sense if you simply want a lower payment and have no plan to pay down the loan faster.

Removing private mortgage insurance (PMI)

If you put down less than 20 percent when you bought the home, your lender required PMI—insurance that protects the lender if you default. PMI typically costs 0.5 to 1 percent of the loan amount per year, added to your monthly payment. Once your loan balance drops to 80 percent of the home's original purchase price, PMI must be removed automatically by federal law (the Homeowners Protection Act).

You can request removal sooner if your home has gained value. If you bought for $300,000 and put down 10 percent ($30,000), your original loan was $270,000. PMI stays on until the balance drops to $240,000 (80 percent of $300,000). But if your home is now worth $350,000, you can ask your lender to remove PMI based on a new appraisal, because your equity is now much higher than 20 percent. The appraisal costs $300 to $500, but if PMI is $200 per month, you recoup that cost in two to three months.

Contact your mortgage servicer (the company that collects your payments) to ask about PMI removal. They will tell you the current loan balance and what balance or home value is needed to remove it. If you're close, paying a lump sum toward principal can get you there faster.

Making a lump-sum payment toward principal

Sending extra money directly to principal (not to next month's payment) reduces the total amount you owe and the interest calculated on future payments. A $10,000 payment toward principal on a $250,000 loan at 5 percent saves roughly $5,000 in interest over the remaining life of the loan.

However, a lump-sum payment does not automatically lower your monthly payment. Your servicer will recalculate the payoff date—you'll own the home sooner—but the payment amount stays the same unless you refinance. If your goal is to lower the monthly payment itself, a lump-sum payment alone won't do it. But it does reduce the total interest you pay and can push you toward PMI removal faster.

Some borrowers use tax refunds, bonuses, or inheritance money this way. Before sending a large payment, confirm with your servicer that there are no prepayment penalties (rare on mortgages, but worth checking) and that the payment will go to principal, not to future payments.

Switching from an adjustable-rate mortgage to a fixed rate

If you have an ARM, your interest rate is set to adjust after an initial period (commonly 3, 5, 7, or 10 years). When the rate adjusts, your payment rises. If rates have climbed since you took out the loan, your new payment could be hundreds of dollars higher. Refinancing to a fixed-rate mortgage before the adjustment locks in today's rate and prevents future increases.

This is a refinance, so closing costs apply. But if your ARM is about to adjust and rates have risen, locking in a fixed rate now can save thousands over the remaining loan term. Calculate the break-even point the same way: divide closing costs by the monthly savings to find how many months until you recoup the cost.

If your ARM has already adjusted and your payment has risen, refinancing to a fixed rate may still make sense if current fixed rates are lower than your current ARM rate. If current fixed rates are higher than your ARM rate, refinancing costs you money and doesn't help.

Loan modification as an alternative to refinancing

If you've fallen behind on payments or are at risk of falling behind, your lender may offer a loan modification—a change to the terms of your existing loan without refinancing. A modification can lower your payment by extending the term, reducing the interest rate, or forgiving a portion of the principal (though principal forgiveness is rare and usually only offered in hardship situations).

Modifications do not require an appraisal or closing costs, which makes them cheaper than refinancing. However, they're typically only available if you're in financial hardship or have missed payments. If you're current on your loan and simply want a lower payment, your lender will direct you to refinancing instead.

If you're struggling to make payments, contact your servicer and ask about loan modification programs. Some servicers have formal hardship programs; others handle them case by case. Be prepared to explain your situation and provide recent pay stubs and tax returns.

Frequently Asked Questions

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 is usually 5 to 10 points and recovers within a few months. Multiple refinance inquiries within 45 days count as a single inquiry, so if you're shopping rates, do it quickly.

Can I lower my payment if I'm underwater on my mortgage?

If you owe more than your home is worth, traditional refinancing is difficult because lenders won't lend more than 80 to 100 percent of the home's current value. You may be able to refinance through a government program like HAMP (Home Affordable Modification Program) if you're in hardship, or you can ask your current lender about a loan modification. Contact your servicer to discuss options.

What if my interest rate is already very low?

If your rate is 2 to 3 percent and current rates are 6 to 7 percent, refinancing will raise your payment, not lower it. In this case, focus on PMI removal if you have it, or making lump-sum payments toward principal to reduce total interest. Extending the term is an option if you need immediate payment relief, but you'll pay significantly more interest overall.

How long does refinancing take?

Refinancing typically takes 30 to 45 days from application to closing. The appraisal takes 7 to 10 days, underwriting takes another 5 to 10 days, and final processing and closing take the remainder. Some lenders offer faster timelines; ask about this when you get quotes.

Do I have to refinance with my current lender?

No. You can refinance with any lender. Shop rates from at least three lenders and compare not just the interest rate but also closing costs, fees, and the timeline. Rates and costs vary significantly between lenders, so getting multiple quotes takes an hour and can save thousands of dollars.