Buying a home is one of your biggest investments. The majority of mortgage applications are written for 30-year terms. At the start of the loan, the majority of your payment will go towards interest.
After paying on a mortgage for several years, you may feel as if you will never pay off the balance.
Mortgages are one of life's major expenses. Circumstances change over time that can impact your ability to repay the loan. Job loss, the birth of a child, sending kids to college, and medical bills can cause a financial strain on the monthly budget.
Some homeowners will begin to look for ways to reduce their mortgage payments.
If you are considering ways to lower your monthly costs, continue reading to learn how to get a lower mortgage payment.
1. Refinance to a Lower Interest Rate
If current interest rates are lower than your existing rate, refinancing can lead to a lower monthly mortgage payment. Having a lower principal balance on the original loan will also ensure a lower payment.
To refinance to a better rate your mortgage needs to be in good standing. It will also help if your credit score is better now than when you first obtained the mortgage.
Keep in mind that by refinancing you're starting over with your mortgage. If you have already paid on your existing mortgage 15 - 20 years it may not be worth it, unless you really need the monthly savings.
For those struggling with debt, you may want to take cash out of your equity to pay off other debt. With a good interest rate, you can still come out on top. In most cases paying off your debt inside of a mortgage will lower your total monthly outgo, even if the new rate is higher.
Either way, ask yourself if you want to commit to paying on a loan for the next 30 years.
2. A Loan Modification is How to Lower Mortgage Payment Costs
Homeowners struggling to pay their mortgage can find relief in a loan modification.
A modification of an existing loan is different than refinancing. With a refinance you are taking out a new loan. The modification means you are changing the terms of your existing mortgage.
With a loan modification, you can lower your payment by getting a lower interest rate or extending the length of the mortgage. It is important that you understand the terms of the modification. You don't want to end up paying a large lump sum at the end of the loan otherwise you may need to sell or refinance.
3. Pay Your Own Insurance and Taxes
A lot of monthly mortgage payments include principal, interest, taxes, and insurance (PITI). Monies for the taxes and insurance are held in an escrow account until the payments are due.
You can contact your loan servicer to see if you can pay your taxes and insurance outside the monthly mortgage. This will lower your monthly payment by a few hundred dollars.
Doing this carries certain risks. You become responsible for these payments. Instead of a monthly amount going into an escrow account, you will need to have the full amount when the bills are due.
It's important to budget for these expenses. If not the mortgage company will re-impose the mandatory escrow. There is also the possibility your homeowner's insurance cancels which could end up putting you in a worse situtaion.
If this happens, the mortgage company can force a more costly policy on you, thereby increasing your mortgage.
Waiving your escrows should be seen as a temporary fix when you are about to have more money coming in but need a little 'breathing room' for a month or two.
4. Refinance to an Interest-only Mortgage
Another tip on how to lower your mortgage payment is refinancing to an interest-only mortgage. This is a great option if you plan to sell your home at some point.
Interest-only loans have been revamped in recent years to protect the borrower. They are not as easily available as they were 10 years ago but remain a good option.
With an interest-only loan, you pay only the interest for a period of 10 years. The remaining twenty years is interest and principal. Although you will enjoy great immediate savings, your mortgage will increase significantly on the back-end.
You can still make payments to the principal balance. So whenever you have extra cash, apply it to your loan.
5. Refinance to a Balloon Mortgage
There are several options when it comes to refinancing your mortgage. The riskiest is probably the balloon mortgage. Like the interest-only loan, this is a way to lower your mortgage payment if you are not planning to stay in your home.
The mortgage gives the borrower lower payments for five to seven years. It's called a balloon mortgage because the final payment will require a lump sum to pay off the balance.
Unless you are expecting a large cash fall, you can plan to refinance your loan before the balance comes due. Use the time to pay-off other bills and to improve your credit.
Balloon mortgages are a risky proposition that shouldn't be taken lightly. They have severe ramifications if the balance is not paid in full when the loan comes due.
6. Eliminate Your PMI
Consumers taking out a conventional mortgage loan are required to have a 20 percent down payment. If this is not possible the borrower may have to buy private mortgage insurance (PMI). The insurance is required until you have paid down the mortgage by 22 percent.
One way to lower your mortgage payment is by having the insurance removed. You can do this by making a lump sum principal payment to reach 22 percent equity in the home.
The monthly cost of PMI is about one percent of the total mortgage. On average a homeowner can save about $300 a month by getting rid of PMI.
The best way to calculate this is to take your current balance and divide by .78 on a calculator. That figure you come up with it the number your house needs to appraise at inorder to remove the PMI.
7. Take in a Boarder
A surefire way to lower your mortgage payment is by taking in a renter. Struggling homeowners may want to give strong consideration to renting out a room or portion of their home. As long as you are occupying the home as your primary residence, taking in a boarder is not considered a violation of the primary mortgage terms.
Having a home near a university could provide the perfect part-time tenants.
Another option to consider if having a full-time tenant doesn't sound too appealing is accommodation-sharing site Airbnb. You can rent a room or your entire home for a few days, weekend, or a week.
Earn extra income to pay towards your monthly mortgage, or use the money to pay down your principal.
Before embarking on this journey, contact a mortgage professional to make sure your plans will not violate the terms of your initial mortgage.
8. Start with a Lower Mortgage
There are other ways to lower mortgage payments before signing on the dotted line. Use these tips to ensure you are buying a home you can afford.
Work on Your Credit
The higher your credit score the better interest rate you will receive. If your score is considered 'below average' don't get in a rush to buy a house. Take some time to improve your score before house shopping.
Pay down or eliminate as much of your existing debt as possible. If your debt to income ratio is unfavorable, it will affect your credit score.
You also want to review your credit history with the three main credit reporting agencies. Clear up discrepancies that are bringing down your score. Using a free online credit checker like Credit Karma is a great way to monitor your progress.
Participate in a First-time Home Buyers Program
First-time home buyers can receive assistance with the purchase of their first home through community grants. The classes do not take long to complete.
In return you will qualify for lower interest rates, will require a smaller down payment, and you'll receive down payment and closing assistance. There are penalties if you sell the home within a specified time, or decide to refinance so it does have its cons.
The worst thing to happen is having to pay back a prorated amount of the money extended to you.
Come up with a Bigger Down Payment
The bigger your down-payment the smaller the loan you will need to secure. This is a proven way to lower your monthly payment.
When you're thinking about buying a home, make a commitment to start saving for a down payment. The sacrifice may seem hard but will pay off in the end with a lower mortgage payment.
Buy a Less Expensive House
Understand your financial situation before purchasing a home. What you think you can afford could very well be out of your range. Just because the bank says you can afford the amount of the mortgage, doesn't mean you should buy that much.
Create an expense spreadsheet and for three months enter every penny you spend. This will give you a clear picture of your true financial situation.
It's okay to admit you can't afford the home at the top of your list. You can decide to wait, or move forward with a less expensive price tag.
Also, consider that the location of your home impacts your taxes and insurance. Buying in a different zip code could get you the same square footage with a lower monthly payment.
Did These Mortgage Payment Reducing Tips Help?
Knowing how to lower mortgage payment costs will help you make the right decision. If you don't get the relief you are looking for it may be time to downsize.
It is easier to get out from under a mortgage you can't afford to pay than stressing and struggling from month to month with unnecessary strain on your mind. The weight of financial problems can affect your health and cause long-term problems in your relationships.
If you are in the market for a new home and you want the lowest monthly mortgage payment, contact us today and we will show you what you can realistically qualify for.