A mortgage is expensive, and often leaves you with a very tight budget to live on. With the cost of living increasing, it’s smart to consider ways to lower your mortgage payment.
A mortgage is represented by four standard components, PITI, which stands for principal, interest, taxes, and insurance. Therefore, reducing mortgage payments is about strategically addressing one or more of these factors. With this in mind, let’s discuss 10 excellent ways to lower your mortgage payment.
How to Lower Your Mortgage Payments in 2024
Lenders typically ensure your mortgage is affordable when you first purchase your home. However, circumstances can change, making what was once affordable no longer manageable. This can lead to unnecessary financial stress as you struggle to make ends meet or even face foreclosure.
The good news is it doesn’t have to be that way. You have more options than you might realize to lower your mortgage payments and reduce your housing costs. We’ll explore ways to lower your mortgage payment while keeping your home. Here are 10 common ways people use to lower their home loan payments:
Refinance with a Lower Interest Rate
Interest rates are one of the first things homeowners look to reduce when lowering their mortgage payments, and refinancing is one of the best ways to achieve that.
Refinance mortgages involve obtaining a new loan to replace your existing one, ideally with a lower interest rate. However, this depends on if you qualify for a new loan that has a lower rate than your current loan.
Here are the prerequisites to qualify for refinance:
- Minimum 20% equity in your home
- Low debt-to-income ratio
- High credit score (at least 620)
Switch to Interest Only Mortgage
If you are expecting an increase in income in the future, and are currently looking for short-term financial relief, switching to an interest-only mortgage is one way to temporarily reduce your monthly payments.
The interest only mortgage loan allows you to pay only the interest for a set period of 5-10 years. Once the interest-only period ends, your payments increase again as you start paying off the principal.
However, if things don’t go according to plan, you are at risk of a significant financial hit once the duration of the interest-only mortgage ends. Therefore make sure to evaluate the long-term financial impact on your finances before you go down this route.
Extend Your Loan Term
Another way of reducing your mortgage payments is to extend the loan term. If you increase a 15-year loan to 30-years, the monthly payments naturally decrease, allowing you to save extra cash each month.
Keep in mind that this is a double-edged sword because extending the loan term also means you will be paying more in interest over the life of the loan. Therefore, always calculate the increased total cost before making a decision.
Get Rid of Mortgage Insurance Premiums
If you pay less than a 20% down payment on your home, your lender will arrange PMI or private mortgage insurance. It protects their interests and essentially compensates them for the risk they take by allowing less upfront cash.
If you have built 20-22% equity in your home, you can request a PMI cancellation if you have a conventional loan. If it goes through, you can save hundreds of dollars annually by eliminating this associated monthly expense. The FHA loan program does not remove mortgage insurance once you reach that 22% level of equity, so keep that in mind when you are choosing a loan program.
Always proactively track your loan-to-value ratio and contact your lender as soon as you qualify for PMI removal.
Overpay on Your Mortgage Payments
Overpaying a mortgage simply means paying more than your normal monthly payment. This has multiple benefits.
Firstly, additional payments towards the principal reduce your overall balance faster, which decreases the amount of interest you pay over the life of the loan.
Secondly, consistently paying extra on a mortgage reflects well on your credit score, which eventually helps secure better terms and lower interest rates on future loans.
Additionally, making extra payments on your mortgage increases your home equity more rapidly. This enables you to refinance on more favorable terms or take out home equity or a line of credit.
Just always make sure that your lender allows principal prepayments without penalties, and consider setting a regular schedule for these extra payments to maximize savings.
Recast Your Mortgage
Your monthly mortgage payments are decided based on the principal balance and the loan term.
A mortgage recast involves making a lump sum payment towards your principal balance. Your lender then re-calculates your monthly payments based on the new outstanding balance. Since the loan terms remain the same, your overall monthly payments, including the interest you pay, go down.
Recasting is a good option if you can afford to put a significant amount of money towards the principal, and want to reduce the monthly burden without changing the loan terms.
Look Into Loan Modification
You can actually negotiate new terms with your lender to make your mortgage more affordable. This can include lower interest rates, an extension of the loan term, or even a reduction of the principal balance.
Loan modifications are typically for homeowners facing financial hardship. Therefore, when applying, you need to provide documentation of your finances, such as income, and expenses, as well as an explanation of the unfortunate financial situation.
It is essential to note that some lenders may not allow loan modifications. Even when they do, there are usually stringent eligibility criteria that you need to fulfill. On top of that, the interest you will be liable to pay after extending the loan term might cancel out any benefits of loan modification.
Therefore, it is vital to evaluate your circumstances and account for all the additional expenses before making a decision.
Appeal Your Property Taxes
High property taxes can increase your monthly mortgage payment, especially if they are included in your escrow account. If you think your property taxes are too high, you can appeal the assessment with your local tax assessor’s office.
Here’s how to go about it:
- Start by reviewing your property tax bill, and compare your home’s assessed value with similar properties in your area.
- Collect evidence such as recent sales data to support your claim.
- Follow the appeals process outlined by your local tax authority.
Use a Streamline Refinance
A streamlined refinance is a simplified refinancing option available for certain types of loans, such as FHA, VA, and USDA loans. This process requires less documentation and often has lower closing costs compared to a traditional refinance. The FHA streamline refinance has helped millions of American borrowers lower their monthly payments over the years.
To qualify, typically you only need to demonstrate a history of on-time payments. A streamlined refinance can help you secure a lower interest rate, reducing your monthly payment.
It’s a quicker and more straightforward process, making it a good option if you are looking to lower your mortgage costs with minimal hassle. Ask about your eligibility for a no cost refinance mortgage.
Apply for Mortgage Forbearance
Mortgage forbearance allows you to temporarily pause or reduce your loan payments if you are experiencing financial hardship. During the forbearance period, your lender agrees to let you skip or make reduced payments, typically for a few months.
This provides immediate financial relief, giving you the time to get back on your feet. While this can be a useful short-term solution, it’s important to understand that you will need to repay the missed payments later, either in a lump sum or through a repayment plan.
What are the Benefits of Lower Monthly Mortgage Payments?
Let’s quickly review why you should know how to reduce your monthly mortgage payment:
- Increased Cash Flow: Lower monthly mortgage payments to free up cash for other uses. With more disposable income, you can cover day-to-day expenses more easily, save for emergencies, and even look for other investment opportunities.
- Debt Reduction: A lower mortgage payment can free up funds that can be directed toward paying down other debts. This eventually improves your creditworthiness, allowing you to secure better loan terms in the future. Consider a bad credit refinance.
- Homeownership Stability: Reduced home loan payments can make homeownership more sustainable in the long term. With a lower financial burden, there is less risk of default or foreclosure, which ensures there is a safe and stable living environment for you and your family.
Conclusion
Struggling to make your mortgage payment can be both frightening and frustrating, but you have more options than you might think to improve your situation. If you’re unsure which option is best or simply want a second opinion, a reputable fee-only financial advisor can offer unbiased guidance.
Mortgage rates cause significant financial strain, and may keep increasing depending on the type of mortgage you have. Instead of waiting for the rates to go down, it’s better to consider reducing your mortgage for financial stability. Shop for 1st and 2nd mortgage rates before making a commitment with one company.
Refinancing, extending your loan term, removing PMI, and exploring other strategies mentioned in the guide can decrease your monthly expenses, and boost the cash flow. Just make sure to always check with your lender to see which option is available to you.
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Frequently Asked Questions
How do I reduce my monthly mortgage payment?
You can reduce your monthly mortgage payment in the following ways:
- Refinance your mortgage to obtain a new loan at a lower interest rate
- Extend the loan term to spread payments over a longer period
- Request to eliminate private mortgage insurance if you have over 20% equity in your home
- Negotiate new terms with your lender
- Appeal property taxes
How much does it cost to refinance my mortgage?
Refinancing a mortgage costs 2 to 5% of the amount of the new loan. This includes application fees, appraisal fees, title insurance, origination fees, and closing costs.
You can compare offers from different lenders to secure the lowest interest rates and fees. Additionally, you can also negotiate to lower or waive the application, origination, or appraisal fees.
Improving your credit score is another way to secure favorable loan terms. Additionally, you should also time your refinance for when interest rates are low to maximize the savings over time.
How many times can you refinance a mortgage?
There’s no limit to how many times you can refinance a mortgage, but you must meet your new lender’s refinance requirements. It’s also important to calculate the costs of refinancing and ensure you stay in your home long enough to reach the break-even point—the time it takes to recoup your closing costs and benefit from the monthly savings of a refinance. Learn how soon you can refinance a mortgage.
How can I negotiate with my bank to get a better interest rate?
You can negotiate loan terms with your lender to get a better interest rate. Research current market rates to get an idea of what to expect. Highlight your good credit history and share other documents (salary slips, income tax return, and bank statements) that demonstrate your financial stability.
On top of this, you might also need to discuss competing offers from other lenders as it strengthens your position and shows you can find a better deal.