Is your budget stretched thin? Are you looking to free up some monthly cash flow? This article looks at how you can lower your monthly mortgage payment. It explores things you can do to pay less when you buy your home and ways you can save money with lower monthly payments on an existing mortgage.
Financial experts recommend devoting no more than 30% of your household income to your monthly mortgage payment. If you’re like many people, that payment might be the single most expensive part of your budget.
Of course, a lot can happen over the life of a mortgage. Perhaps you’ve started and grown a family, changed jobs, gone back to school, or had other unexpected expenses. These all can strain your cash flow.
The good news is that there are ways you can have a lower mortgage payment and get that cash flow back on track. These include tips you can follow when shopping for a home, along with ways to save on an existing mortgage.
Five ways to lower your mortgage payment when you buy your home
Saving money as a homeowner begins when you’re buying your home. Consider these ways to lower your mortgage payment when you buy.
1. Improve your credit score
Lenders base your mortgage rate on your credit score and other factors. The lowest interest rates go to those with scores in the mid-700s or above, but any increase in your score will likely help you save money.
According to FICO, the national average interest rate on a 30-year fixed-rate mortgage for someone with a 650 credit score is 3.856%. Find the most current fixed mortgage rates here. The average rate drops to 3.035% for someone with a 700 credit score. That difference in interest would save you almost $90 per month on a $200,000 mortgage.
Need more guidance on credit? Lean more about how your credit affects your mortgage rate.
2. Make a bigger down payment
Saving for and making a bigger down payment can help you reduce your monthly payment in two ways.
First, a larger down payment means you’ll be financing less, which can lead to a lower monthly payment. Second, if you can make a down payment of at least 20% of the home’s purchase price, you’ll also avoid paying private mortgage insurance (PMI).
Let’s say you make a 3% ($7,500) down payment on a $250,000 home, and your lender offers you a 30-year fixed-rate mortgage with a 3% interest rate. Your monthly mortgage payment will be $1,022. PMI estimated at 1% annually will cost $202 per month, making your total payment $1,224.
Now, let’s say you instead make a 20% ($50,000) down payment on that home. If we assume the same mortgage terms, your monthly mortgage payment will be $843. There will also be no PMI. You’ll save a total of $381 per month!
3. Look for a no-PMI loan
If you can’t afford a 20% down payment, look for loans that offer no PMI (a few options are included in our list of smart alternatives to 20 percent down).
Some lenders offer no-PMI programs, often targeted at first-time homebuyers. They may also provide lender-paid PMI in exchange for a higher interest rate (always do your math to ensure it’s a good deal).
If you’re active-duty military, a veteran, or a surviving spouse of a veteran, check out VA Home Loan offerings. Offered by the Department of Veterans Affairs, these are typically available with no money down and no monthly PMI payment.
4. Choose an adjustable rate mortgage (ARM)
ARMs offer a fixed interest rate for an initial period, say five or seven years (also known as a 5/1 or 7/1 ARM). After that, the lender can vary the interest rate annually until you pay off the loan. ARMs typically have a lower initial rate than what’s available on a fixed-rate mortgage with the risk of a higher rate (and higher payment) later on.
However, if you’re planning to sell your house within a few years of purchasing it, a low-interest ARM may be a good way to save money on your monthly payment.
5. Shop around for homeowners insurance
Homeowners insurance rates vary among carriers, so be sure to shop around. The Insurance Information Institute (III) recommends getting quotes from at least three insurers. You can get quotes online or contact an independent insurance agent to do the shopping for you.
Here are more tips to save money on your homeowners insurance from the III.
Seven ways to lower an existing monthly mortgage payment
If you’ve been in your home for a few years and are now finding it more challenging to make your monthly payment, consider these ways to make your mortgage more affordable.
1. Build enough equity to stop paying private mortgage insurance (PMI)
As explained above, PMI can add a significant amount of money to your monthly mortgage payment. Once you’ve built 20 percent equity in your home, ask your lender to remove those PMI payments (if they don’t do it automatically).
One way to build equity faster is to make extra lump-sum payments. Be sure to ask the lender to apply those additional payments to your loan’s principal balance.
Another way to build home equity faster is by capitalizing on a hot real estate market. In 2021, home prices soared as demand to purchase outpaced the supply of homes for sale. Increasing home values can create greater equity for homeowners. Reappraising your home in a hot market can create a pathway to avoiding PMI if you exceed the minimum thresholds with your lender. If you’ve owned your home for at least five years and your home loan balance is less than 80% of the newly appraised value, then you can request that your lender eliminate PMI. Note that the appraisal is an out-of-pocket cost, but that cost may be minimal in comparison to the amount of money you’ll save with no PMI.
2. Refinance your mortgage to a lower rate
Mortgage interest rates are expected to tick up in 2022, but they’ve remained at historical lows throughout 2021. So if interest rates have dropped since you purchased your home, consider refinancing. As a rule of thumb, a drop of at least 75 basis points, or 0.75% off your current rate, typically makes refinancing worthwhile once you factor in closing costs.
Unsure if refinancing is right for you? Check out the pros and cons of refinancing for homeowners to help you determine the best path for you.
3. Challenge your property taxes
Your property taxes make up part of your escrow payment and contribute to the overall cost of owning a home. If you think there’s nothing you can do about the amount you pay the government, think again.
According to the National Taxpayer’s Union Foundation (NTUF), 30%-60% of properties are overvalued by tax assessors. Yet only 5% of homeowners appeal their property taxes. The majority of homeowners who do appeal, however, win at least a partial victory.
The NTUF offers tips on how to appeal your property tax assessment.
4. Continue to shop your homeowners insurance
Periodically shop your homeowners insurance once you own your home to make sure you’re getting the best rate. Not only do rates vary between companies, but other life events can significantly impact your insurance needs. The Insurance Information Institute (III) recommends reviewing your insurance at least once a year.
Here’s a tip: The most significant insurance discounts are often given to customers who insure their car and home with the same company. As you shop, be sure to check how much you could save by bundling your policies in this way.
5. Request a mortgage recast
If you’ve made extra payments toward your mortgage — either paying a little extra each month, or making a lump-sum payment — consider asking your lender about a mortgage recast. This may help you lower your monthly payment.
A recast is when the lender recalculates the monthly payment based on your remaining balance and loan term. It’s not a refinance, so your interest rate, remaining mortgage term, and equity remain unchanged. There are neither closing costs nor a lengthy application process.
6. Ask about mortgage loan modification or mortgage forbearance
If you’re struggling to make your payments, ask about a mortgage loan modification. This is when the lender agrees to extend the number of years you have to pay the loan, lowers your interest rate, or lowers your principal balance.
A similar process, mortgage forbearance due to financial difficulties, reduces or suspends your payments for a short period. Since March 2020, the CARES Act has provided COVID-19 mortgage relief in the form of forbearance to millions of homeowners with federally backed mortgages (including Fannie Mae and Freddie Mac loans).
It’s in the lender’s best interest to keep you in your home and making payments, so they’ll often be open to these measures. Understand, though, that the lender will grant a modification or forbearance at their discretion. They’ll expect you to provide information — such as proof of income — that ensures you’ll be able to hold up the deal.
7. Check out government-sponsored mortgage assistance plans
The federal government offers additional programs for those struggling to make their monthly mortgage payment. These include the Home Affordable Modification Program (HAMP). HAMP is for borrowers who are employed but having financial difficulty making payments. You must have started your mortgage before January 1, 2009, owe less than $729,750, and have sufficient income to support a modified payment.
The Biden administration recently announced a variety of actions to help prevent foreclosures. Learn more about government programs to help you lower your mortgage payment.
Frequently asked questions on lowering mortgage payments
What goes into a mortgage payment?
The several parts of a mortgage payment include:
- Principal — This is the money you borrow from the lender to purchase your home. The amount that goes to principal and interest shifts over time and will be reflected in your lender’s amortization schedule.
- Interest — This is a money you pay to the lender as a fee for their services. It’s calculated as a percentage of the overall principal (your interest rate).
- Property tax — This is money paid to your local government and is based on your property’s value. Your property value may be assessed regularly, resulting in a change to the amount of property tax you pay.
- Private mortgage insurance (PMI) — If you cannot make a large enough down payment (typically at least 20%), your lender may charge for PMI. This is insurance the lender has to cover their investment in case your loan goes into default.
- Homeowners insurance — This protects you financially if your home is damaged or destroyed by events such as fire or severe weather. It usually provides you with liability coverage in case an accident occurs on your property.
What is an escrow payment?
Escrow refers to an account set up by your mortgage lender, similar to a savings account. The lender will have you make a single monthly escrow payment covering your mortgage (principal and interest), property taxes, homeowners insurance, and PMI (if necessary). After taking out the funds for the principal and interest, the lender deposits the remainder into the escrow account. It then pays your tax, homeowners insurance, and PMI bills, automatically and on your behalf, when they come due.
Should I just sell my home and look for a new one?
If you’re having a hard time making your mortgage payment, you might conclude that you’re in a home that’s just too expensive. You can consider buying a new home, but be sure you do your math to make sure you’re not incurring an even greater expense. Buying a new home will entail a new mortgage with a new down payment, interest rate, and closing costs. Property taxes may be higher if you move to a different town. If you work with a realtor to sell your home, you’ll need to pay a commission. You should factor in other expenses as well, such as hiring movers.
There are several ways to save money on your current mortgage. Be sure you’ve explored all of them before you take the step of selling and moving.
If you have any questions or would like to discuss your mortgage financing needs, contact us today and connect with a home lending expert.