The payments of your mortgage are determined by 3 main factors:
- The term or period of time your mortgage will amortize. The longer your term, the lower your payments. If you have an interest only payment, your loan will not amortize during this period of time, so it would be considered an infinate amortization period.
- The original loan amount. The larger the loan, the higher your payments.
- Your interest rate. The higher the interest rate, the higher your payments.
With a normal fixed rate amortizing mortgage, your payments remain the same over the entire length of the mortgage. Even though your principal balance is going down over the life of the mortgage, there is no reduction in your monthly payments.
If you were to refinance to a mortgage with the same interest rate and amortization as your current mortgage, but the loan amount of the new mortgage were lower than the original loan amount; your payments would decrease.
This will depend on what type of mortgage loan you have. Home Equity Lines of Credit, as well as some interest only loans will automatically amortize. This means that the payment which is due every month (typically an interest only payment) will move down as you pay down the principal balance.
If you have a standard fixed rate loan, the loan typically will not automatically reamortize. This means that even if you make additional payments to reduce your principal balance, your monthly payment will not automatically reduce. What will happen in this case is that, since you owe less money, less interest will accrue on the loan each month. When you make the monthly payment, since the payment amount is the same, more of that money goes to principal which will reduce the balance even faster. The end result of paying additional principal but maintaining the same monthly pay is that you will pay your loan off faster than the initial term.
On a side note, some lenders allow you to reamortize a loan for a small fee. In this case, if you were to make a large one time principal reduction, adding a large portion directly to you principal, you can petition the lender to allow you to reamortize the loan. If they allow it, they will normally charge a small fee ($500 is average), and will reamortize the remaining principal balance over the remaining term of the loan. This will drop your monthly payment. A lender will normally only allow you to reamortize a loan one time however, so it is something that must be considered carefully.
The only way you get the monthly payments to fluctuate on a home mortgage is either to have a Home Equity Line of Credit (HELOC) that adjusts monthly or to refinance your first mortgage by making a substantial down payment on the principal. Your monthly payment usually consists of four parts. Principle, interest, taxes, insurance (PITI) and “mortgage insurance” if you owe more than 79.9% and have certain types of loans.
Remember, you have expenses any time you refinance a home loan. So, while the monthly payments will not be reduced if you do not refinance, the length of the loan and the amount you will pay for the of having the loan will be reduced and the indebtedness will be paid off quicker, by making any additional payment to the principle each month.
I would suggest that you do this only after having liquidated all other consumer credit lines. Remember to not close the lines of credit, but to only pay them off because this will help your FICO score go higher.
Take all your information about your different outstanding loans and analyze them to see what strategy will work best for you. Use a financial advisor if you have questions.