Content of the material
- Focusing on Insurance
- Consider an Interest-Only Loan
- Rent Out Part of Your Home
- The Bottom Line On Lowering Your Mortgage Payment
- How To Lower Your Mortgage Payments If You Already Own a Home
- Can I change my mortgage payment due date?
- Strategies that may help reduce monthly payments
- Who qualifies for a refinance?
- 6. Choose an interest-only mortgage
- Recast Your Mortgage
- What Is Mortgage Insurance?
- Seek a Tax Reassessment
- 4. Get rid of your PMI
- 4. Shop Around For Lower Homeowners Insurance Rates
- The Amortization Schedule
- 4 ways to lower your mortgage payments with a refinance
- Refinance to a lower interest rate
- Extend your loan term
- Refinance to a fixed-rate mortgage
- Use a Streamline Refinance
- How do I
Focusing on Insurance
When you buy a home with less than 20% down, the lender typically requires mortgage insurance to protect them in case you stop making payments. Mortgage insurance can be hundreds of dollars each month, depending on the size of your loan, so this can be a big win for your pocketbook.
The good news is that there are countless homeowners insurance companies offering policies to cover your home. It pays to revisit your policy every couple of years. Contact your current insurer and some competitors to ensure that you’re getting a good deal.
When you talk with the agents, compare coverage based on your current policy, then also discuss additional ways to save. You may qualify for savings through promotions, memberships, eliminating unnecessary coverage or adjusting your deductibles. Since most mortgage payments include homeowners insurance and property taxes, lowering your insurance premiums can reduce your mortgage payment.
As you’ve been paying down the loan each month and home values continue to rise, you may be at the magical 80% loan-to-value marker. Some lenders remove mortgage insurance automatically based on the loan schedule, while others allow you to get rid of it based on the home’s current value. In this case, you’ll pay for an appraisal to show how much your home is worth and submit it with the required documentation to the lender. With FHA loans, you may have to refinance your loan in order to remove the mortgage insurance.
Consider an Interest-Only Loan
Some mortgages allow you to pay interest only during the initial period. For instance, if you have a 30-year mortgage, the lender might require interest only for the first five years. At the end of the interest-only period, you begin paying principal and interest; count on your payments rising dramatically.
Carefully calculate whether you will be able to afford the future increase before taking such a loan. Additionally, an interest-only loan makes sense only if conditions indicate the value of your house will rise quickly.
Rent Out Part of Your Home
Renting out a room in your home or guesthouse technically won’t lower your mortgage payment, but it will certainly help you afford it. Put those funds directly toward your monthly mortgage bill to pay less out of your own wallet.
The Bottom Line On Lowering Your Mortgage Payment
You may be able to lower your mortgage payment by refinancing to a lower interest rate, eliminating your mortgage insurance, lengthening your loan term, shopping around for a better homeowners insurance rate or appealing your property taxes.
If a refinance is the path you choose for lowering your mortgage payment, then Rocket Mortgage® can help. With Rocket Mortgage, you’ll be able to see your options and understand just how much money you could save every month. Start your mortgage refinance application online now!
How To Lower Your Mortgage Payments If You Already Own a Home
If you’re already a homeowner but your mortgage payments have become impossible to manage — or you fear you won’t be able to afford them throughout the life of the loan — don’t panic. There are steps you can take to decrease your mortgage payments.
Can I change my mortgage payment due date?
Your mortgage payment due date will be set when you close on your home. Lenders’ policies vary regarding your ability to change your due date, but you can always ask. Keep in mind that most loans will have a grace period, meaning you have an additional number of days to make your payment before you’ll be charged a late fee. Some loans may also allow borrowers to choose biweekly payments.
Strategies that may help reduce monthly payments
- Lower your rate. You may be able to lower the rate of your current loans or your credit cards, especially if your credit score has improved or if overall interest rates have gone down since you initially applied for the loan. Make sure to consider any fees that might be associated with refinancing. Consider refinancing
- Consolidate your debt. You may be able to lower your monthly payments if you consolidate multiple loans or credit cards into one new loan with a lower rate or longer term. And because there are different ways to consolidate for different needs, Wells Fargo will work with you to find the right option. We encourage you to carefully consider whether consolidating your existing debt is the right choice for you. Consolidating multiple debts means you’ll have a monthly single payment, but it may not reduce or pay your debt off sooner. Consider debt consolidation
- Extend the length of your loan. Another way to potentially pay less each month is to qualify for refinancing that extends your loan repayment period or term length. Just be aware that your repayment period will increase, which can increase the overall amount that you repay and your total cost of borrowing.
- Compare debt pay down strategies. If you are working to pay down your existing debt, there are a couple of different strategies you can take, each with its own pros and cons. See which may work best for you by reviewing the Snowball versus Avalanche methods of paying down debt.
Who qualifies for a refinance?
Many borrowers who currently have a mortgage loan are eligible to refinance.
According to Khari Washington, mortgage broker and owner of 1st United Realty & Mortgage, the requirements for refinancing a loan are similar to those for purchasing a home. Washington says a lender will look at:
- Your debt-to-income ratio (DTI)
- Your credit score
- The equity in your home
- The stability of your income
- Your current home value
You should also understand the costs and benefits of a refinance to decide if it’s right for your situation.
Keep in mind that you will pay refinance closing costs, which are typically 2-6% of your loan amount. The average refinancing closing costs across the country are $5,749, per recent data from ClosingCorp, a real estate data and technology firm.
To find out if a refinance is worth it for you, compare your estimated closing costs with your monthly savings. If you’ll save more in the long run than you spend upfront, a refinance is typically worth it.
6. Choose an interest-only mortgage
When you get a mortgage, some lenders don’t require you to begin paying off your balance right away and will offer you an interest-only loan. Interest-only (I/O) mortgages occur in two stages: the first phase, where you only pay the interest on your mortgage and the second phase, where you pay off the actual principal balance plus interest.
If you have a 30-year mortgage and spend the first five years paying only interest, your monthly payment may seem pretty low, but you must pay off the rest of your mortgage in the remaining 25 years. I/O mortgages are a temporary way to lower your mortgage payments and can work out as long as you plan to increase your payments after the interest-only phase is up.
Recast Your Mortgage
If you’ve been paying more than the required amount, or have savings that you could put toward your mortgage, you may be able to lower your monthly payments by recasting your mortgage.
Unlike refinancing, recasting won’t reset your loan term or change your loan’s interest rate. Instead, recasting will reamortize your loan, which creates a new payment schedule based on the current principal balance.
For example, if you have a 30-year, $400,000 mortgage with a 3.65% APR, your monthly payment may be about $1,830. Ten years into the loan, your balance will be about $311,000.
Making an extra $11,000 payment won’t lower your monthly mortgage payment, although it can lead to paying off the loan early. However, your lender may allow you to recast the loan based on the $300,000 principal balance. You’ll keep the same term and interest rate, but your monthly payment drops to about $1,763, or $67 less a month.
When it’s an option—only some mortgages lenders offer recasting and it’s not available on government-backed loans—there may be a fee of around $200 to $250 for recasting.
What Is Mortgage Insurance?
There are two kinds of insurance associated with a mortgage payment. The first one is property insurance, which protects the home and everything in it, more or less, from man-made and natural disasters. The second kind of mortgage insurance is called PMI and if you bought your home with a downpayment of less than 20%, you will have to pay this insurance in order to protect the lender, if you suddenly can't pay your loan back.
Seek a Tax Reassessment
Homeowners may forget the role taxes play in how much money goes into escrow. Review your annual property appraisal to determine whether it fairly reflects the value of your property.
Visit the property assessor’s website to review the values assigned other properties near you that are comparable to your home. If they are assessed for less, or if recent sales suggest property values are dropping, you can, and should, appeal your assessment.
Instructions for how to appeal your appraisal also can be found on the property assessor’s website.
Remember: The assessed value of your property isn’t its market-appraised value. The tax assessor establishes the assessed value independently. If the collector refuses to reassess your home and you have evidence that the assessment is inflated, you can file a complaint with your county government and can request a hearing with your state’s Board of Equalization.
4. Get rid of your PMI
If you bought your house and put down less than 20% of the purchase price as a down payment, you’re probably paying mortgage insurance on top of your regular mortgage payment. This can add tens or even hundreds of thousands of dollars to the overall cost of your home loan.
The good news, however, is that you can get rid of PMI. First, you have to repay enough of your mortgage so that you gain at least 20% equity in your home.
Then, you can request your lender drop your PMI. Your lender may send an appraiser to your property to verify how much equity you have in your home, but either way, if it is removed, your mortgage payment will be lowered.
At the same time, if you want to find out if your homeowners insurance is too expensive, we’ve partnered with Policygenius, which helps you compare multiple rates all in one place.
4. Shop Around For Lower Homeowners Insurance Rates
If you’re paying for your homeowners insurance as part of your monthly mortgage payment, then shopping for a better homeowners insurance rate could be an easy way to lower your overall monthly payment.
Call around to insurance companies to get quotes, and don’t be shy about asking for discounts. You could save money based on certain features of your home, like security systems and fire alarms. You could be eligible for a discount based on your employer or job status. And bundling your homeowners insurance with your auto insurance and other policies could save you money too.
You can also review your coverages to make sure you’re not overpaying for something you don’t need. If you can afford it, raising your deductibles is a surefire way to make sure your premiums are lower. Just make sure you know what coverage your lender requires if you’re reducing or eliminating anything. A good insurance agent should be able to help you find ways to save money while making sure all your bases are covered.
The Amortization Schedule
A mortgage’s amortization schedule provides a detailed look at what portion of each mortgage payment is dedicated to each component of PITI. As noted earlier, the first years’ mortgage payments consist primarily of interest payments, while later payments consist primarily of principal.
In our example of a $100,000, 30-year mortgage, the amortization schedule has 360 payments. The partial schedule shown below demonstrates how the balance between principal and interest payments reverses over time, moving toward greater application to the principal.
As the chart shows, each payment is $599.55, but the amount dedicated to principal and interest changes. At the start of your mortgage, the rate at which you gain equity in your home is much slower. This is why it can be good to make extra principal payments if the mortgage permits you to do so without a prepayment penalty. They reduce your principal which, in turn, reduces the interest due on each future payment, moving you toward your ultimate goal: paying off the mortgage.
On the other hand, the interest is the part that's tax-deductible to the extent permitted by law – if you itemize your deductions instead of taking the standard deduction.
FHA-backed mortgages, which allow people with low credit scores to become homeowners, only require a minimum 3.5% down payment.
4 ways to lower your mortgage payments with a refinance
Refinancing your mortgage can have huge financial benefits — especially if you’re strategic about it. There are multiple refi programs to choose from, and using the right one can help maximize your savings.
Four ways to lower your monthly mortgage payment with a refinance include:
- Refinancing to a lower interest rate
- Refinancing into a longer loan term
- Switching from an ARM to an FRM
- Using a low-doc, Streamline Refinance
Let’s take a look at each refinance option in a little more detail.
Refinance to a lower interest rate
The primary reason homeowners refinance is to lower their mortgage interest rate. This lowers your monthly mortgage payments — but that’s not all. It can also save you thousands (or tens of thousands) over the full life of the loan.
“For example, say you have a 30-year loan with a $200,000 balance at a 3.75% interest rate,” explains Eileen Derks, head of mortgages at Laurel Road. “If you refinance at a 2.75% interest rate, you’ll lower your monthly payment by [about] $100 and save $39,500 in total interest payments over the life of the loan.”
If you’ve had your existing mortgage for over two years — or if your finances have improved since you bought your home — there’s a good chance you could qualify for a lower rate and substantial monthly savings.
Extend your loan term
Another option is to refinance and extend your term, which is the amount of time you have to pay off your loan. The advantage here is that you will lower your monthly payment and provide additional monthly cash flow.
“Let’s assume you have a current loan balance of $250,000, at a 3.25% interest rate, with 18 years remaining on your loan. Your current monthly payment is approximately $1,532,” says Derks.
“By refinancing to a new term of 30 years, still at a 3.25% interest rate, your new monthly payment would be approximately $1,088, providing extra monthly cash flow of about $442.”
This strategy can work even if you already have a low interest rate. Just note, you could end up paying more in total interest. But if your main goal is a lower monthly mortgage payment, that might not matter.
Refinance to a fixed-rate mortgage
Perhaps you have an adjustable-rate mortgage (ARM), which offers a fixed rate for the first few years of your loan with a variable interest rate thereafter. While your rate may go down, it can also spike up, leading to much higher monthly payments than you can comfortably afford.
But if you refinance to a new fixed-rate mortgage loan, you eliminate the uncertainty of variable rates and can possibly save more money over the life of your loan.
“Say you have an adjustable-rate 30-year mortgage loan with a $200,000 original balance and a 2.5% interest rate that is about to jump, after your first five years, to a 3.5% interest rate,” says Derks.
“In this scenario, your monthly payment would increase from around $790 to approximately $881 — nearly $100 more per month because of the rate adjustment.
“But if you refinance to a new 25-year fixed-rate loan, which would not add any extra years to your term, and locked in at a 2.75% interest rate that rolls in your $4,000 closing costs, your monthly payment would be $830. This would allow you to save $50 per month compared to not refinancing.”
Refinancing from an ARM to a fixed-rate mortgage might not yield huge monthly savings. But it does give you additional financial security because you won’t have to worry about your rate or payment increasing in the future.
Use a Streamline Refinance
A fourth choice is to consider a Streamline Refinance, available on many FHA, VA, and USDA home loans.
With a Streamline Refinance, the lender is not obligated to re-check your income, credit, or employment. That means the loan can close much more quickly and possibly avoid a lot of paperwork.
What’s more, with a Streamline refi, you can skip the home appraisal. That means you can refinance with little to no home equity accrued — and you may lock in a lower rate than you would with other types of low refinancing.
“With a Streamline Refinance, the lender is usually not allowed to add closing costs to the loan balance, and the interest rate and monthly payment must be lowered enough to make it worthwhile for the borrower,” adds Derks.
“Essentially, a Streamline refi allows the borrower to obtain a lower rate and payment for very little cost and very little effort,” she explains.
How do I
- Get tips for managing debt
- Know what lenders look for
- Calculate my debt-to-income ratio
- Compare debt pay down strategies