Lowering your monthly mortgage payment can significantly impact your financial flexibility, and there are several effective strategies you can explore, ranging from restructuring your loan to reducing associated housing costs.
Strategies to Reduce Your Monthly Mortgage Outlay
Reducing your mortgage payment often involves a combination of direct adjustments to your loan terms and smart management of the associated costs. Here are key methods to consider:
Refinance Your Mortgage
Refinancing involves taking out a new mortgage to pay off your old one. This can be particularly beneficial if interest rates have dropped significantly since you obtained your original loan, or if your credit score has improved.
- How it works: You secure a new loan with a lower interest rate or a longer repayment term (e.g., extending a 15-year loan back to 30 years).
- Benefit: A lower interest rate directly translates to smaller monthly interest payments, reducing your overall payment. A longer term stretches out your principal repayment, also lowering monthly costs.
- Considerations: Be aware of closing costs associated with refinancing, which can sometimes be substantial. While a longer term lowers your monthly payment, it typically means you'll pay more interest over the life of the loan.
Recast Your Mortgage
Mortgage recasting, sometimes called re-amortization, is a less common but effective option if you've recently come into a lump sum of money. It allows you to apply a significant payment directly to your loan's principal.
- How it works: You make a large, one-time principal payment, and your lender recalculates your future monthly payments based on the new, lower principal balance. Your interest rate and loan term remain the same.
- Benefit: By reducing the principal, the amount of interest you pay each month decreases, leading to a lower overall monthly payment without the need for a new loan or significant closing costs.
- Distinction: Unlike refinancing, recasting typically has minimal fees and doesn't involve changing your loan's interest rate or term.
Eliminate Mortgage Insurance
If you made a down payment of less than 20% on a conventional loan, you likely pay Private Mortgage Insurance (PMI). If you have an FHA loan, you pay Mortgage Insurance Premium (MIP). Both add to your monthly housing expense.
- How to eliminate PMI: Once you've built up at least 20% equity in your home, you can usually request your lender cancel PMI. Lenders are legally required to cancel it once your equity reaches 22% of the original home value.
- How to eliminate MIP (FHA): For FHA loans, MIP can sometimes be removed after 11 years if you put down 10% or more, or by refinancing into a conventional loan once you have sufficient equity.
- Benefit: Removing mortgage insurance directly reduces the non-interest portion of your mortgage payment.
Modify Your Loan
A loan modification is a permanent change to the terms of your original mortgage, often pursued by homeowners facing financial hardship that makes their current payments unaffordable.
- How it works: Your lender might agree to change your interest rate, extend your loan term, or even reduce your principal balance (in rare cases) to make your monthly payments more manageable.
- Benefit: It provides a pathway to more affordable payments when other options aren't viable due to financial difficulties.
- When to consider: This is typically a last resort before foreclosure, and it requires working directly with your lender to explain your hardship and explore available programs.
Lower Your Property Taxes
Property taxes are often included in your monthly mortgage payment as part of your escrow account. A reduction in your property taxes will directly lower this portion of your payment.
- How to achieve:
- Appeal your property assessment: If you believe your home's assessed value is too high compared to similar homes in your area, you can appeal it with your local tax assessor's office.
- Apply for exemptions: Many localities offer property tax exemptions for homeowners, such as homestead exemptions, senior citizen exemptions, veteran exemptions, or disability exemptions. Check what you might qualify for in your area.
- Benefit: Any reduction in your property tax bill will translate into a lower monthly escrow payment.
Shop Around for Lower Homeowners Insurance
Similar to property taxes, your homeowners insurance premium is typically collected by your mortgage lender and held in an escrow account, contributing to your overall monthly payment.
- How to lower:
- Get multiple quotes: Don't stick with the first insurer; compare rates from several companies.
- Increase your deductible: A higher deductible means lower monthly premiums, but you'll pay more out-of-pocket if you file a claim.
- Bundle policies: Many insurance companies offer discounts if you bundle your homeowners and auto insurance policies with them.
- Inquire about discounts: Ask about discounts for security systems, smoke detectors, being a non-smoker, or having a new roof.
- Benefit: A lower insurance premium will directly reduce the escrow portion of your mortgage payment.
Apply for Mortgage Forbearance
Mortgage forbearance is a temporary relief option designed for homeowners experiencing short-term financial hardship, such as job loss, illness, or other emergencies.
- How it works: Your lender temporarily allows you to pause or reduce your monthly mortgage payments for a set period.
- Benefit: It provides immediate, temporary relief from your mortgage obligation, giving you time to recover financially.
- Important note: Payments are not forgiven; they are deferred and must be repaid later, either in a lump sum, through a repayment plan, or by adding them to the end of your loan term. This is a temporary solution, not a long-term strategy for lowering payments.
By exploring these options, you can find the best approach to make your mortgage payments more manageable and align with your financial goals.