How To Lower Your Mortgage Payments
Buying a house is probably the biggest purchase you’ll ever make – at least until you buy your next one – and you’ll almost certainly need a mortgage loan to finance the property.
How big that loan is, and how much principal and interest you’ll pay the lender each month, can make a huge difference in the life you have after moving in. Take steps early to make sure you can afford the monthly payments; make a 20% down payment so you have equity in the home right away and have at least a three-month emergency fund available. If something unexpected like a job loss or accident happens and you start struggling to make monthly payments, research options like refinancing the loan, renting out a room, finding government hardship programs or looking for ways to reduce insurance and taxes so you can maintain the home until things turn around.
It certainly is worth your effort. Housing prices have increased a lot over the years, recovering from a big drop during the Great Recession of 2008 to approach new record highs in many markets.
The Mortgage Bankers Association estimates that Americans applying for mortgages requested an average $309,200 loan in January 2017. A 30-year fixed rate mortgage for that amount at 4.1% interest comes with $1,494 monthly interest and principal payment. That doesn’t include a monthly escrow payment for insurance and property taxes, which could add considerably to the bill.
Saving even a little on your mortgage payment can make the difference between a week’s vacation at the lake or a staycation during the summer. Here are some ideas for lowering your payments and putting more money in your piggybank.
Ditch the Private Mortgage Insurance
Private mortgage insurance, or PMI, should be called a lenders’ protection policy. If you make less than a 20% down payment on your home, lenders consider you a risk. Why? The biggest worry a lender faces is default and foreclosure. Foreclosing on a home isn’t cheap for the lender and can take months while the house is in legal limbo and not producing any income, so lenders want to cover themselves.
Rather than turn down your loan application due to a small down payment, lenders require that you obtain a policy from an insurer that guarantees the lender will recoup at least 20% of the purchase price you default. You must obtain and keep the policy until your equity reaches 20% of the home’s value.
There are only two ways to accomplish this: Increase your equity through extra principal payments or buy a home that quickly increases in value.
Since mortgage insurance isn’t cheap and you can never get the insurance money back, it makes sense to reach the equity threshold as quickly as you can. Better yet, don’t buy a property unless you can afford at least a 20% down payment.
Refinance for Permanent Relief
If you got a mortgage a decade ago with a 7% interest rate, you can probably get a lower rate now. Shopping around for a better rate and refinancing the loan is generally a good idea, especially if you can shave several percentage points off your annual rate.
Refinancing has costs. A refinanced mortgage is a new loan, so you will probably have to go through all the steps it took to get your original loan. Lenders will want to verify your income, assess your credit score and have your house appraised. It might also assess loan closing costs. Some lenders will absorb these costs. When shopping, always asks about the refinancing charges and who will pay them.
Refinancing is an action but also a strategy. You should consider what strategy makes the most sense for you. Here are a few:
- Refinance at a lower rate and take equity out of the home. If you owe $150,000 on your mortgage and you house has an appraised at $250,000, you could apply for a larger loan. Refinancing pays off your old mortgage and replacing it with a new one. If your home value and income justify a larger loan, you could take a bigger mortgage and pocket the cash. You might even end up with a smaller monthly payment.
- Refinance and add equity. A lower interest rate will mean smaller monthly payments even if your loan balance remains the same. If you can add more principal to the new loan, your payments will decrease even more.
- Extend the loan term. If you’ve been paying down a 30-year mortgage for 10 years, refinancing with a new 30-year mortgage could substantially lower your payments. Though you would add a decade to the repayment period, your payments would be smaller even if the interest rate remained unchanged. If the interest is lower, your payments would decrease even more.
- You can also extend the loan term without refinancing by re-amortizing. For a small fee, lenders will often allow you to add years to your loan repayment. The upside is that your monthly payment will shrink, but interest will make up a larger percentage of your monthly payment and you’ll be paying for years more. Re-amortizing also avoids the hassles and costs of applying for a new loan. This is not a suggested strategy.
- Shrink the loan term. If you have a 30-year mortgage and refinance to a 15-year mortgage, you generally can get a better interest rate than if you refinanced to a new 30-year loan. The downside is you monthly payment likely will be larger, but you could pay the loan off quicker and the portion of each payment that is principal would increase dramatically.
Seek a Tax Reassessment
Some homeowners forget that they play a role in how much money goes into escrow. It’s important to review your annual tax assessment to determine if it fairly reflects the value of your property. Go on line to the tax assessor’s website and look at value assigned to other properties near you that resemble your home. If they are assessed for less, or if recent sales suggest property values are dropping, you should appeal your assessment.
Remember that the assessed value of your property isn’t its 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.
Reduce Homeowners’ Insurance Payments
Mortgage lenders require that you maintain replacement value insurance on your home to protect their loan. But there are usually multiple insurance companies willing to write a policy, and some charge less than others for equivalent coverage. You should periodically check with other insurers to make sure you have the best deal and switch insurers if you don’t. One hint: check with the company that insures your car. Companies often offer bundled rates if you have more than one policy.
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 only require interest for the first five years. After the interest-only period ends, you would begin paying principal and interest. Naturally, your payments will jump considerably at the end of the interest-only period. You should carefully consider whether you will be able to afford the future increase before taking such a loan. It only makes sense if you are extremely confident the value of your house will rise quickly.
Putting Your House to Work for You
If you have extra space – especially if your house has a guest wing – consider renting out a room. This could mean extra income that can offset your mortgage, tax, insurance and maintenance cost. This solution might work best if you know the tenant and can negotiate agreeable terms.
Another option, particularly if you’re self-employed, is to designate a room as a home office. You can deduct the room on your income tax return if it is used exclusively for business. Contact a tax adviser before doing this.
Interest Rate Reductions and Loan Modifications
Lenders might agree to lower your mortgage interest rate temporarily, or even permanently, if you can show you have a financial hardship. To make this happen, you’ll need to apply for a loan modification, which requires acceptance by the lender. Some lenders offer loan modifications themselves; in other cases, you might need assistance from the federal Home Affordable Modification Program (HAMP), which funds modifications. The application deadline for HAMP is December 31, 2018. In all cases, you need to show that you can’t afford your current mortgage payment and you can’t qualify to refinance the loan, yet you have the wherewithal to afford the mortgage at a reduced rate.
Move to a Less Expensive Home
If you decide that you can’t afford your home and other strategies won’t work, consider selling. Staying in a house you can’t afford can lead to default, the worst outcome for your finances. If you sell your home, you can use the proceeds to buy a less expensive place, or you could invest the money and rent. Remember that you’ll have to pay a real estate commission if you use an agency to sell your property.
Wathen, J. (2017, February 25) Here’s the Size of the Average American’s Mortgage. Retrieved from: https://www.fool.com/mortgages/2017/02/25/heres-the-size-of-the-average-americans-mortgage.aspx
NA (2017, November 13) Home Prices Boom 10 Years After Housing Crisis. Retrieved from: https://www.prnewswire.com/news-releases/home-prices-boom-10-years-after-housing-crisis-300554102.html
Pant. P. (2017, November 17) Learn How to Lower Your Monthly Mortgage Payment. Retrieved from: https://www.thebalance.com/lower-monthly-mortgage-payment-453817
NA, ND. Home Affordable Refinance Program. Retrieved from: https://www.makinghomeaffordable.gov/get-answers/Pages/program-HARP.aspx