You've signed the documents, the ink is dry, and now you're set with the same mortgage payment forever, correct? Not quite.
There are many ways to lower your monthly mortgage payment and help you save money. It may mean refinancing thanks to lower mortgage rates, leveraging the increasing equity in your home, or even dealing with financial hardships. Let’s explore the options available to homeowners to see which could best fit your unique situation.
First, it’s important to understand what’s in a mortgage payment to begin with so we can understand how to lower it.
WHAT MAKES UP MY MORTGAGE PAYMENT?
Remember the acronym PITI , which stands for Principal, Interest, Property Taxes and Homeowners Insurance. These four components are the bulk of a mortgage payment. Principal and interest go to pay down a home loan, while the funds for property taxes and homeowners insurance are held in an escrow account for use when insurance premiums and taxes are due.
Beyond PITI, the next most common element of a mortgage payment is mortgage insurance. Mortgage insurance has two forms: Private Mortgage Insurance (PMI) and a Mortgage Insurance Premium (MIP).
PMI is assessed on conventional loans, which are the most common mortgage in America today. If you bought a home with a down payment of less than 20% of the home’s purchase price, PMI was likely added to your loan. PMI is insurance that protects the lender in the event of nonpayment. MIPs, on the other hand, are only assessed on an FHA loan. FHA mortgage insurance premiums behave differently than PMI, which will limit our ability to lower those payments.
Now that we know what’s in our monthly payment, let’s take a look at getting those costs down.
How can I lower my mortgage payment?
Big picture - there are two ways to lower your mortgage payment:
- 1 - Lower, or eliminate, elements of the PITI discussed above or,
- 2 - Lengthen the loan term
Each of the methods below goes about accomplishing those goals in a different way.
Lower my mortgage payment by refinancing
One of the most common ways to lower a mortgage payment is through refinancing. Refinancing involves paying off your current loan and replacing it with a new mortgage with either a lower interest rate, longer loan term, or both.
Mortgage rates fluctuate with the broader financial markets. Remember your current interest rate and keep an eye on the market. If rates drop, contact your mortgage lender and see what options are available to you. You can also contact a mortgage professional and tell them you are interested in refinancing and often they will help you track when rates drop to an appropriate level based on your current rate.
You will need to pay closing costs when refinancing just like a new home loan. Take these costs into account when evaluating a refinance. You’ll likely want to stay in your home long enough to recoup those costs as savings on your monthly mortgage, otherwise a refinance may not make sense for you.
Lenders may have rules around when you can refinance. Often, they include minimum timeframes a borrower must have lived in the home. Be sure a refinance won’t trigger any early payment penalties on your home loan, too. Those fees could easily eliminate any money you save monthly.
Recast your mortgage
Mortgage recasting involves making a large, lump sum payment to reduce the principal balance. A new monthly mortgage payment is then recalculated using the same interest rate and term on the reduced principal.
This could be ideal for someone who may feel constricted on their monthly budget but has recently gotten a windfall through inheritance or other means. There is a cost to perform a recast, usually less than $500, and most lenders will require a minimum lump sum payment of over $5,000 to perform one.
Cancel mortgage insurance
The cost of private mortgage insurance (PMI) varies depending on loan size, down payment, and a borrower’s credit score, but is generally between 0.58% and 1.86% of the original loan amount annually. That translates to somewhere between $100 and $200 each month for PMI for a typical homebuyer.
PMI is cancelled automatically by a lender when the loan-to-value ratio (LTV) reaches 78%. To say it another way, when a borrower’s equity reaches 22% of the home’s assessed value, PMI goes away without any additional effort on behalf of the homeowner.
It is also possible to cancel PMI quicker in a number of ways. In both of the situations below, you must be in good standing on the loan, meaning no recent late payments.
- Borrowers can request early termination of PMI based on the original value of the loan when LTV reaches 80%. In this situation, lenders are required to do an appraisal of the home to ensure it hasn’t decreased in value.
- Borrowers can also request early termination of PMI based on current property value. If a home has increased in value, or you have made improvements that increase its value, that increase is included in your equity. A new valuation of the home may qualify you for early termination. The home will require an appraisal, which is paid for by the borrower.
If you have an FHA loan, and are paying a MIP, cancellation is a bit more difficult. Depending on the size of the original down payment and when you took out the loan, you may be eligible to remove the MIP after a period of 11 years. Otherwise, the MIP is set for the life of the loan.
One option available to borrowers with an FHA loan that does not qualify for MIP cancellation is to refinance to a conventional loan.
Find less expensive home insurance
Another way to lower your mortgage payment is to shop around for a new home insurance provider. You can easily comparison shop online, get quotes, and compare coverages to ensure they meet your needs. If you’ve added other insured products like cars, RVs or boats over time, many providers will provide bundled discounts that could help lower your insurance bill.
Appeal your property taxes
Property taxes are levied by local municipalities and depend on three factors:
- The assessed value of your home or property.
- The property tax rate.
- Any exemptions for which a person may qualify, such as those for senior citizens, veterans, low-income households, and individuals facing a disability.
You can dispute the assessed value of a property by contacting the local taxing authority. You’ll be asked to provide evidence that an assessment is too high, including comparable sales of properties in your area, proof of the costs for repairs needed on your home, or photos of recent damage or deficiencies.
Apply for a loan modification
With a loan modification, borrowers work with a lender to permanently change the terms of a loan to create a payment that is easier to manage. The modification program will do one or more of the following things:
- Lower the interest rate
- Extend the repayment period
- Directly reduce the loan principal
- Convert an adjustable-rate mortgage to fixed-rate
To qualify for a loan modification program a borrower needs to prove significant financial hardships, like a disability, the death of a family member that had been the main financial provider, a natural disaster or other highly disruptive events. Modifications are only available for homes that are your primary residence.
Conventional, FHA, VA, and USDA loans all feature some kind of modification options. Many allow you to extend the payback period to up to 40 years, which can significantly lower your payment. If you are considering a loan modification, it’s best to reach out to your lender and explore the options that may be available to you.
Seek mortgage forbearance
Mortgage forbearance is another way to deal with extreme hardship. Forbearance will either significantly reduce mortgage payments or permit you to stop paying them entirely for a limited amount of time, usually up to a year. Mortgage interest will still accumulate during that time, and you will still need to pay back the loan eventually.
Forbearance can be helpful because it avoids foreclosure and extremely adverse credit reporting events, although it will likely have some impact on your score. If you are considering applying for forbearance, you should talk with your lender before attempting to pause your payments.
Don’t struggle silently with your monthly mortgage payment. There are resources and assistance available to help and multiple ways to reduce your payment. Reach out to Union Home Mortgage today to get in contact with an expert.
The information provided here is for informational purposes. When interest rates and loan program information are included, it is for illustration purposes only and not a solicitation or quote for services. This is not an advertisement or loan estimate. Current interest rates, loan programs and qualification criteria can change at any time. If you have questions or need assistance, we can be reached using the contact information above.
