How To Lower Your Monthly Mortgage Payment

Article Summary:

Mortgage payments have a significant impact on the monthly budget of many households. It is probably your largest monthly expense. Thankfully, there are multiple ways to reduce the monthly mortgage payment, so your budget can breathe.

Lowering your monthly mortgage is one of the easiest ways to free up some room in your budget. The process of making it happen may not be the smoothest, but the hassle is all worth it as it helps with your savings and other financial commitments.

Here are 9 ways you can lower your monthly mortgage payment.

1. Refinance with a lower interest rate

One of the most recommended methods to lower your monthly mortgage payment is refinancing your home loan amount with a lower interest rate. Lower interest rates can lead you to big savings. To illustrate, let’s say you have a $200,000 mortgage at 5.0% and you refinance it for a mortgage with a 4.0%. Your monthly payments would drop from $1,074 to $955: a savings of $119. That may not sound like much, but over a year it’s $1,428. If you keep the mortgage for 10 years, you would save a total of $14,280.

Mortgage refinance costs

Unfortunately, refinancing a mortgage is not free. There are costs involved. It can cost anything between 2% and 6% of the mortgage balance. On a $200,000 mortgage, you can expect to pay costs between $4,000 and $12,000. Mortgage refinancing can save you a lot of money. However, it is important to estimate your actual savings before jumping into a mortgage refinance, because the costs can outweigh the savings. Usually, if you can lower your mortgage by 1%, you can get substantial savings. However, ever rate drops of 0.25% or 0.5% can save you money. It all depends on the closing costs and how long you plan to stay in your home.

There are several ways to get your loan refinanced with a lower interest rate. It requires adequate home equity and keeping an eye on the mortgage rates in the market. If mortgage rates have dropped or your credit score has improved, you may want to shop for a mortgage refinance to lower your monthly payments. However, calculate the cost of refinancing your mortgage and determine how long it will take to recover the closing costs.

2. Refinance to a longer-term mortgage

Extending the term of your mortgage helps to lower your mortgage payment as well. This can be done by either modifying your current loan balance or, by obtaining a new loan.

For example, let’s say that you have taken a $300,000 30-year-fixed loan 10 years ago with a 4.125% interest rate. If you refinance it with another 30-year fixed loan at the same interest rate, you will spread the remainder of your loan balance over another 30 years. It reduces your monthly payment from $1,599 to $1,453, without the taxes and insurance, and puts an extra $146 in your monthly savings.

However, this process may include additional interest charges, so it is important to calculate the overall cost when considering this method of lowering your monthly mortgage payments.

Here is SuperMoney’s guide to the best mortgage refinancing lenders.

3. Lower homeowners insurance rates

When your monthly mortgage payment includes a chunk of homeowners insurance payment, it increases your monthly payment. The homeowner insurance premiums can increase over time too, which will further increase your overall monthly payment. You can lower your monthly payments by finding a homeowners insurance policy with lower premiums.

It is often possible to lower your insurance premiums by installing security features, increasing your deductible, or comparing the rates of multiple insurance companies. You can also save money by bundling insurance policies, such as auto insurance and homeowners insurance together. So, make sure to speak to multiple insurers and get several quotations, so you can compare them and make a better decision.

4. Get rid of the mortgage insurance

Paying mortgage insurance can add a significant amount to your monthly mortgage payment. Based on your loan type, you can eliminate mortgage insurance to get a lower payment. Here’s how.

Getting rid of FHA Mortgage Insurance Premium

FHA loans are offered with low credit scores and small down payments, and therefore, FHA-backed lenders use Mortgage Insurance Premium (MIP) to protect themselves against the high-risk homebuyers. With a 10% down payment, you can eliminate the MIP after the first 11 years. However, if the down payment was less than 10%, you are stuck with the MIP for the remainder of the mortgage.

To get rid of the MIP, you can refinance your FHA loan into a conventional mortgage without a private mortgage insurance. This article provides an in-depth discussion of how you can get rid of your mortgage insurance premium.

Getting rid of Private Mortgage Insurance

Typically, homebuyers must buy private mortgage insurance (PMI) when they cannot make a down payment of at least 20% of the home’s purchase price. FHA loans (and other government-subsidized mortgages) also charge a mortgage insurance premium. The good thing is, you can eliminate PMI without refinancing. If it is a conventional loan, PMI gets automatically eliminated once you have 22% equity on your regular payment schedule. You can also request the removal of the PMI once you hit 20% equity.

5. Re-assess your property taxes

When there is an escrow account on your mortgage, the property taxes become a noticeable part of your monthly mortgage payment. Property taxes are calculated according to the county’s tax assessment. The assessor does a comprehensive analysis to determine the value of your home and land, and based on that, your property tax amount is calculated. The assessed value can be usually found on the tax bill, and you can also gather details about it from your local county recording office’s website.

Sometimes, properties can be overvalued, which would generate a high tax bill and higher monthly payments. You can compare the values of the recently sold houses of similar kind in the area to understand more about it. If you think your home is overvalued, you can prepare a home appraisal, and request to have the assessment done again. When the value is reduced, it results in low property taxes, which leads to a lower monthly payment.

Furthermore, find out about the property tax exemptions in your area, especially if you are a differently-abled person, or a senior citizen.

6. Switch from an ARM to an FRM

With an Adjustable-Rate Mortgage (ARM), you can qualify for significantly lower interest rates and lower monthly payments for a certain time period. After that initial fixed-rate period, the interest rate changes as the federal interest rates fluctuate. It can happen at monthly, quarterly, or yearly intervals.

When the Federal Reserve decides to raise the interest rate, your interest rate goes up too, resulting in high mortgage payments in that particular month/ period. This unpredictable nature of ARM may cause you to spend an extra amount on your mortgage.

The Fixed-Rate Mortgage, on the other hand, has a more stable nature. It ensures that you would be making the same monthly payment until the day you pay off your mortgage. However, FRM has a comparatively high interest rate, but it is fixed, so there is a guarantee that you would not be charged any additional cost.

7. Recast your mortgage

With a mortgage recast, you can make a large lump sum payment towards the loan principal and let your lender recalculate the new monthly principal and interest payment according to the new principal balance. While it gives you a new amortization schedule, it will not make any changes to the interest rate or the number of years remaining in your mortgage plan. It simply creates a lower monthly mortgage payment and reduces your principal balance.

Some lending services require a minimum lump sum payment for a recast and a service charge.

8. Ask about a forbearance plan

A forbearance plan can help you out when you are unable to make the regular mortgage payment due to a short-term financial hardship. It intends to provide temporary relief by lowering your mortgage payment and in some instances, suspending monthly payments for a specific period of time. Make sure to seek this service from your lender before missing a payment, and not after. Once the mortgage forbearance period is over, the payments recommence as usual and you may require to make up for the missed amount.

9. Ask for a loan modification

A loan modification helps you to lower your monthly mortgage payments, by restructuring the original conditions of your existing mortgage, like reducing the interest rate, principal balance, or changing the loan term. You can ask for a loan modification from your lender, if you are behind on mortgage payments or based on the financial hardships that you have been going through.

Lowering your monthly mortgage payment – FAQs

Do monthly mortgage payments decrease over time?

In some scenarios, your monthly mortgage payments actually can decrease over time. For example, if you make a huge lump sum payment and ask to recast the mortgage, the outstanding principal balance will spread over the remaining months left on the loan. This new monthly payment is smaller than the old one.

A mortgage payment can decrease if you have an adjustable-rate mortgage (ARM) also. Due to its adjustable rate, you can wind up with a lower interest rate, based on the federal interest rate fluctuation. There is always the option to refinance your mortgage with a lower interest rate, which will give you a lesser monthly payment.

What if I pay an extra $1,000 on my mortgage?

If you pay an extra $1,ooo on your mortgage, you will save a lot of money in interest payments and pay it off sooner. To illustrate, let’s say you have a $200,000 mortgage (30-year term and 5% interest rate) and you pay an extra $1,000 a month. You will pay it off 20 years earlier and save $130,200 in interest payments.

What happens if you make 1 extra mortgage payment a year?

Paying 1 extra mortgage payment a year is another way to pay off your mortgage early. It reduces the loan term and lets you have more home equity. One way to do this is with bi-weekly mortgage payment instead of monthly payments. On a $200,000 mortgage with a 5% interest rate and a 30-year term you could save $34,724 in interest and pay the loan off 5 years earlier with biweekly mortgage payments.

Does paying down principal lower monthly payments?

Typically, making a lump-sum payment won’t lower your monthly payments unless you recast your mortgage. If you recast a mortgage (i.e., re-amortize the loan using the new principal balance) you can lower you monthly payments by spreading the new balance over the remaining term of the mortgage. However, recasting a mortgage will typically require a fee.

In summary, lump-sum payments will help you shorten the length of your loan term, lower interest payments over the life of the mortgage. It will also allow you to build equity faster. So, it has plenty of advantages, but it will not necessarily lower your monthly payments now unless you recast the mortgage. On the other hand, if you have an interest-only (or balloon mortgage), then you are more likely to see a drop in your monthly payments. Nevertheless, not all lenders will change your monthly payments even in this scenario. So, it’s a good idea to contact your lender if your goal is to lower your monthly payment.

Key takeaways

  • Refinancing is the most popular method of lowering mortgage payments.
  • Eliminating mortgage insurance and shopping for a lower homeowner insurance rate can reduce your monthly mortgage payments significantly.
  • Paying off a mortgage ahead of schedule leads to great savings and helps to build equity faster.
  • Paying down principal does not always lower your monthly mortgage payment.
View Article Sources
  1. – Homeowners guide to success
  2. CFPB – How does paying off a mortgage work?
  3. CFPB – Options when you can’t make mortgage payments