Increasing Your Mortgage by Hundreds of Dollars a Month Could Actually Save You Money.

When mortgage rates started plunging to record lows back in the summer of 2020, my husband and I decided to take advantage of that situation by refinancing our mortgage. We wound up locking in a much lower interest rate on our loan due to market conditions (and the fact that we had good credit helped as well).

But instead of shrinking our monthly mortgage payments, refinancing our loan resulted in higher monthly payments. Why so? It's simple. We refinanced from a 30-year loan to a 15-year loan.

Why did we go that route? Mortgage rates had gotten so low by the summer of 2020 that cutting our repayment period in half didn't add all that much money to our monthly payments. And since we were able to swing the higher payments we were left with, we figured we might as well go for it and save ourselves money on interest.

If you like the idea of paying less interest on your mortgage, then you may want to consider refinancing to a shorter loan term. While your monthly payments might increase once you do so, you can save yourself a lot of money in the long run.

The numbers add up

Let's say you sign a 30-year, $240,000 mortgage at 6% interest. That leaves you with a monthly payment of $1,439 for principal and interest on your loan. It also means paying $278,000 in interest over the life of your loan.

Now, let's imagine mortgage rates fall a lot one year into your repayment period. At that point, you may be able to refinance to a 15-year loan at 4.5% interest. Doing so will increase your payment amount by roughly $400 per month. But you'll also end up spending $90,477 on interest to pay off your loan, as opposed to $278,000.

(To be clear, these numbers aren't exact because you'd have whittled down some of that $278,000 the first year of paying off your loan. But they're close, and the point is to illustrate that higher monthly payments can result in a lot of savings over time.)

It could pay to take on higher housing costs

It's important to only take on mortgage payments you can fit into your budget comfortably. In my case, we had wiggle room in our budget to afford higher mortgage payments, so we were okay with that increase. If you're not okay with it, don't refinance and raise your monthly payments.

But there may come a time when your income has risen, you've shed some non-housing debt, and you're in a position to take on higher monthly mortgage payments. Doing so could mean saving yourself a lot of money on interest -- and also, eliminating your mortgage payment earlier in life so it's no longer something you have to deal with on a monthly basis. And financial benefits aside, there's something to be said for knowing a mortgage payment is no longer going to eat up a significant portion of your monthly paycheck.

 

This article was written by Maurie Backman from The Motley Fool and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.