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Like every other homeowner, you have several personal expenses to deal with. You need money to pay for your children’s tuition, pay for medical bills, or even fund your living expenses.
It is not surprising that the majority of homeowners are looking for ways to lower their mortgage payments.
If you’re one of these homeowners, your average monthly mortgage payment is probably the most significant monthly expense you have.
And if you’re looking to lower your monthly expenses, lowering your mortgage payment may be the logical place to start your budget cut.
By reducing your mortgage payments, you can quickly free up funds for your other personal needs.
Don’t worry. In this article, we’ll show you several quick and easy strategies that can help you lower your mortgage payments without affecting the terms of your loan.
How Can I Lower My Mortgage Payment?
- Refinance to a Lower Interest Rate
- Get Rid of Mortgage Insurance
- Refinance Your Mortgage to a Longer Term
- Apply for Mortgage Forbearance
- Mortgage Recast
- Modify Your Mortgage Loan
- Compare Homeowner Insurance Rates
- Dispute Your Property Taxes
How to Lower Your Monthly Mortgage Payment
Lowering your monthly mortgage payments comes with a lot of benefits.
The benefits are numerous, from freeing you enough money to handle other crucial expenses to saving you money that would have been spent on the loan.
If you hope to tap into the benefits that come with lowering your monthly mortgage payment, then the following steps can guide you through.
#1. Refinance to a Lower Interest Rate
If you’re looking to lower your monthly mortgage payment, then refinancing to a lower interest rate can save you quite a lot of money.
With the average mortgage interest running into thousands of dollars annually, refinancing to a lower rate can mean big savings.
For example, let’s say you took out a 30-year $300,000 home loan with a 4.3% interest rate and 20% down payment. Then, you qualify for a mortgage refinance rate that’s 0.85% lower at 3.15%. With this interest rate, your monthly payments drop from $1,682 to $1,487. You save $195 a month, or $70,200 over the life of the loan, minus any closing costs.
While you can do a mortgage refinance when you have built up enough equity in your home, you should only consider doing a refinancing if you can remove at least 0.75% off your current mortgage interest rate.
By refinancing at this point, you’re bound to save more money on interest payments. If you’re hoping to refinance your mortgage anytime soon, below are some of the major refinance options available to most homeowners:
- FHA Streamline loans: According to the latest requirements by the Federal Housing Administration regarding mortgage refinancing, homeowners who have had an FHA loan for at least seven months may qualify for a streamlined refinance. If you are eligible for an FHA streamline refinance, it is common for lenders to check your assets and verify if you had paid the last six mortgage payments on time. Please note that your lender may not verify your income nor appraise your home.
- USDA Streamline loans: Backed by the US Department of Agriculture, homeowners with an active USDA loan may qualify for the USDA streamlined assist program. To qualify, your lender will have to check if you have made punctual payments on your mortgage over the last 12 months. It is also common for lenders to check if your household income falls within the required limit. Typically, qualification for USDA streamlined refinance program does not require home appraisal and credit score.
- VA Streamline: U.S. Department of Veterans Affairs loans might be eligible for the Interest Rate Reduction Refinance Loan (IRRRL) program. However, you’ll pay a VA lender fee that’s equal to 0.5% of the loan amount.
- Conventional Refinance: While conventional loans do not have the streamlined refinance feature common with government-backed loans, homeowners with conventional mortgages have access to other refinance options. When you opt for one of the available conventional refinance options, your lender will evaluate your income, credit history, and check your debt-to-income ratio before approving your request.
#2. Get Rid of Mortgage Insurance
Generally, PMI and MIP are designed to protect the lender if you default in the loan repayment. While most PMI and MIP costs hover around 0.22% to 2.25% of a mortgage loan amount, getting rid of them can save you more money. While there are several ways to get rid of mortgage insurance, the method you choose will depend on your home loan.
Once you reach 22% equity in your home, your mortgage lender is legally required to cancel your PMI automatically.
However, you may decide to write to your lender to cancel your mortgage PMI once you hit 20% equity in your home by making the regular mortgage payments or through a sudden home appreciation of your home value.
More importantly, if getting up to 20% equity in your home seems difficult, you can refinance with lender-paid mortgage insurance (LPMI) to get rid of your monthly PMI payments.
FHA & VA loan
If you took out an FHA or VA loan that requires you to pay for MIP regardless of your down payment, you might need to refinance into a conventional loan to get rid of mortgage insurance once you hit 20% equity in your home.
Refinancing into a conventional mortgage allows you to request for cancelation of your mortgage once you hit 20% equity. Also, you’ll only have to pay for MIP for the first 11 years if you put down 10% or more.
#3. Refinance Your Mortgage to a Longer Term
If your goal is to lower your monthly mortgage payments, then refinancing your mortgage to a longer-term loan may be your best bet.
Refinancing to a new longer-term mortgage allows you to spread your mortgage balance over more payments, lowering your monthly mortgage payments.
Let’s say you purchased your condo 15 years ago with a $300,000 30-year fixed-rate mortgage. With an annual interest rate of 4.5%, your monthly mortgage payment may round up to $1,520.
Now let’s say you have decided to lower your monthly mortgage payment. Since you’ve made payments for 15 years, your mortgage balance would have been reduced to $197,164.
By refinancing to a new 30-year mortgage, you can quickly spread the mortgage balance over thirty years. So, your new payment with the same interest rate will then be $999, saving you a difference of $521.
#4. Apply for Mortgage Forbearance
With around millions of Americans struggling financially, applying for mortgage forbearancecan help you lower or even pause your mortgage payments.
In simple terms, mortgage forbearance temporarily allows homeowners to pause or request that a lender lowers their monthly mortgage payments for a specific period.
According to the CARES Act, borrowers are entitled to 180 days of paused or lowered mortgage payment and an extra 180-day extension upon request.
So, if you’re experiencing financial difficulty, you should consider applying for a mortgage forbearance from your lender.
Remember that paused or lowered payments are not forever and will resume back to normal at the end of your mortgage forbearance period.
#5. Mortgage Recast
Another way to lower your mortgage payments is by asking your online mortgage lender to recast your mortgage.
Recasting your mortgage means that you’ll pay off a large chunk of your mortgage balance upfront and spread the new mortgage balance over the remaining term of your loan.
When this happens, your lender will recast or recalculate your mortgage payments at a lower loan balance.
If you’re applying for a mortgage recast, you may need to pay at least $5,000 to $10,000 towards your current mortgage balance.
For example, let’s say you want to recast a $300,000 mortgage with 20 years remaining on it by contributing $100,000 in cash.
The resulting $200,000 principal balance would then be recalculated or amortized over that same 20-year term. However, the monthly payment would drop from $1,475 to $1,238.
Recasting your mortgage is an excellent idea if you’ve received a large sum of money, maybe from the sale of your previous home, or refinancing doesn’t fit your situation. However, government-backed loans like FHA and VA loans do not offer this feature.
#6. Modify Your Mortgage Loan
Like with mortgage recast, if you’re faced with financial difficulty and your mortgage payments are no longer affordable, a loan modification may be an excellent option.
With a mortgage modification, your lender might have to modify your loan by extending your loan term, reducing your interest rates, and even lowering your mortgage payments.
Before opting for any of the available federal mortgage modification programs, you should reach out to your lender to find out if you are eligible and how it can lower your mortgage payments.
Remember that you don’t have to be late on your mortgage payment to request a loan modification.
Once you’re faced with an income reduction or loss of employment, you can reach out to your lender to modify your mortgage.
#7. Compare Homeowner Insurance Rates
When applying for a mortgage, it is common for lenders to request that you get homeowner insurance.
The homeowner insurance protects you and the lender in the event of destruction or loss of the property.
Since most homeowners pay for their homeowners’ insurance premium as part of their monthly mortgage payment, then shopping for a better insurance rate can help you lower your mortgage payment.
Reach out to insurance companies to get quotes and discuss your peculiar home situation. You may be able to get discounts from insurance agents.
Home insurance companies may offer you a lower premium rate if you have installed a better security system or increased your home protection against natural disasters.
Check with your lender on how you can switch insurance policies and still meet your loan requirements.
#8. Dispute Your Property Taxes
Once you purchase a home, you’re bound to pay property taxes based on your home value to your local government.
However, what you may not know is that you can dispute the property value assessment of your home.
If you feel your home was overvalued, you can send an appeal to your local county recording office.
Remember that you may have to present a recent home appraisal, or a report of comparable homes recently sold in your property location.
A reduced assessment value of your home could result in a lower property tax bill and even a lower monthly mortgage payment.
>> More: What Is Transfer Tax?
How to Lower Your Mortgage Payments While Closing on a Loan
If you’re still in the phase of getting a mortgage, below are several ways you can lower your potential monthly mortgage payments.
#1. Improve Your Credit Score
Whether you’re taking out a conventional, FHA, or even USDA loan, the key to getting a mortgage with excellent terms is by presenting an excellent credit history.
Your credit score serves as proof of your creditworthiness. A high credit score proves to lenders that you’re more likely to repay the loan.
And if you’re hoping to lower your potential mortgage payments, the first step starts with improving your credit score.
It is common for borrowers with high credit scores to receive a lower interest rate which means lower monthly mortgage payments in the long run.
You can also improve your credit score by paying off your high-interest credit card debts and closing collection accounts.
#2. Put Down a Large Down Payment
The best way to lower your potential monthly mortgage payment is by borrowing a lower amount of money.
And making a larger down payment is the easiest way to reduce your mortgage amount. The smaller your mortgage, the lower the amount of principal you’ll need to be paying back.
In addition, if you put down at least 20% on a conventional loan, you can easily avoid paying for PMI.
For instance, you took out a 30-year $150,000 home loan with a 3.2% interest rate. With a 10% down payment, your mortgage payments would amount to $1,059 a month.
But that payment falls to $975 if you put down 20% instead. Your monthly payments drop by $84, and you end up paying about $10,000 less in interest over the life of the loan.
#3. Negotiate Closing Costs
When you take out a mortgage to buy a home or refinance an existing mortgage, your mortgage disclosure will consist of several fees aside from your down payment.
Typically referred to as closing costs, these fees can amount to 3-5 percent of the loan amount. That is, if you’re taking out a $200,000 mortgage, you may need to spend around $6,000 to $10,000 in closing costs.
If you’re looking to lower your potential mortgage payments, negotiating your closing costs can be of great help.
#4. Compare Lenders and Fees
Never assume that the first lender you approach will give you the best fees and loan terms when applying for a mortgage.
Comparing interest rates, lenders’ fees, and loan offerings across lenders can save you a lot of money in mortgage payments.
>> More:See the Best Mortgage Lenders
#5. Choose an Adjustable-Rate Mortgage
While it is common for homeowners to opt for a 30-year fixed-rate mortgage due to the stability it offers, choosing an adjustable-rate mortgage or ARM can help you lower your mortgage payment.
Opting could help you lower your monthly mortgage payment for a period of three, five, or even seven years which are regarded as the initial fixed-rate period.
Before choosing an adjustable-rate mortgage, you must understand how your loan will change after the initial fixed-rate period.
More importantly, you should discuss the degree to which your loan will adjust over the loan term with your loan officer.
Can You Negotiate a Lower Mortgage Payment?
Yes, it is possible to negotiate a lower monthly mortgage payment with your lender. Some of the ways to negotiate for a lower monthly mortgage payment are by negotiating with your lender on some of the closing costs, recasting your mortgage, applying for mortgage forbearance, and modifying your loan.
If you’re in the process of getting a mortgage, paying a larger down payment, improving your credit score, and lowering your DTI ratio are some of the ways to reduce your potential monthly mortgage payment.
Is It Hard to Lower Your Monthly Mortgage Payment?
Lowering your monthly mortgage payment is never a hard thing to do as long as you meet the requirements. Depending on the mortgage payment reduction strategy you choose, your lender will request that you provide verifiable documents to back your request. More importantly, before opting for any of the above-listed strategies, you should endeavor to discuss your options with a loan officer for guidance.
Bottom Line: How to Lower Your Mortgage Payment
It is no longer news that reducing your monthly mortgage payment can help you save money as a homeowner.
With several mortgage payment reduction strategies to choose from, it is easy for homeowners to get easily confused on which approach would fit their situation.
Before selecting any of the above-listed strategies, you should first consider the pros and cons.