How To Lower Your Mortgage Payment: 7 Strategies To Consider
Is your monthly mortgage payment eating into your savings? Has paying your other monthly bills become a challenge because you are sending so many dollars to your mortgage lender? You can get financial relief by lowering this payment in several ways, whether that means refinancing your mortgage to one with a lower interest rate, lengthening the term of your loan or eliminating private mortgage insurance and the monthly fee that comes with it.
Whether your income has taken a hit because you’ve lost a side gig, your employer has cut your hours or your company has eliminated overtime pay, lowering your monthly mortgage payment could provide a boost to your financial health.
How To Get A Lower Monthly Mortgage Payment
You have several options for lowering your monthly mortgage payment. If one of the below options works for your situation, you could decrease the amount of money that you spend on your mortgage each month.
1. Refinance To A Lower Interest Rate
The most common way to lower your monthly mortgage payment? Refinancing your existing mortgage loan to a new loan with a lower interest rate. By lowering your interest rate, you can shave hundreds of dollars off your monthly mortgage payment.
Say you are paying off a $350,000 30-year, fixed-rate mortgage with an interest rate of 6.81%. Your monthly payment, not including property taxes or homeowners insurance, would be $2,284.
Now say that you have paid off enough of your loan to get its balance down to $310,000. If you refinance that $310,000 to a 30-year, fixed-rate mortgage with an interest rate of 6%, your new monthly payment, again not including insurance or taxes, would be $1,858.
With that refinance, you'll have lowered your monthly payment by $426. That comes to a savings of more than $5,100 a year.
There are some caveats, though: In an environment in which mortgage interest rates are higher, you also might not be able to refinance to a lower rate. If the interest rate on your existing mortgage is 4%, you probably won’t be able to get a lower rate than that even with a refinance.
Then there is the price: You can expect to pay from 3% to 6% of your loan’s outstanding balance in origination fees. If you owe $300,000, you can expect to pay a minimum of $9,000 to close a refinance. You can roll that cost into your new mortgage’s balance. Make sure, though, that your monthly savings from a refinance will be high enough to quickly cover those fees.
2. Remove Mortgage Insurance
If you take out a conventional mortgage, one not insured by a government agency, and have less than 20% equity in your home, you’ll have to pay for private mortgage insurance, better known as PMI. This type of insurance protects lenders in case you stop making your mortgage payments.
The price of PMI varies, but you can expect to pay from 0.5% to 2% of your loan amount each year. If you take out a $300,000 loan, your PMI can range from $1,500 to $6,000 a year.
If you take out an FHA loan, one insured by the Federal Housing Administration, you’ll pay a different form of mortgage insurance, the mortgage insurance premium or MIP. There are two types of MIP. The first, your loan’s upfront MIP, comes out to 1.75% of your loan amount. For a $300,000 mortgage, that comes out to $5,250, an amount that you can roll into your total loan balance.
Each year, you’ll also have to pay an annual MIP. This amount ranges from 0.15% to 0.75% of your loan amount, which comes out to $450 to $2,250 a year on a $300,000 mortgage. This is broken down and added to your 12 monthly payments over the course of each year.
But are you stuck with PMI or MIP forever? Not necessarily. And removing these forms of insurance can reduce your monthly mortgage payment.
How To Remove A Mortgage Insurance Premium (MIP)
Most homeowners with FHA loans will have to pay mortgage insurance premium for the life of their loans. There are two exceptions: If you made a down payment of 10% or more when taking out your loan, you might be able to request that your lender remove your MIP after you’ve made 11 years of payments.
And if you took out your FHA loan before June 3, 2013, you might qualify for removal of your MIP if you have built at least 22% equity in your home.
In other cases, you’ll need to refinance from an FHA loan to a conventional mortgage to remove your MIP. To do this, you’ll typically need at least 20% equity in your home. Equity is the difference between the value of the home and the amount you owe on it. If you apply for a refinance, your lender will order an appraisal to determine your home’s current market value, which will determine how much equity you’ve built.
How To Remove Private Mortgage Insurance (PMI)
It’s easier to remove private mortgage insurance from a conventional loan. It’s all about building the right amount of equity.
You can request that your loan servicer remove PMI from your loan when the principal balance of your mortgage is scheduled to fall to 80% of the original market value of your home. Your lender is required to give you this date in writing on the PMI disclosure form you received when closing on your mortgage.
To request that your lender removes PMI, you'll need to send a written letter and be current on your mortgage payments. Your lender might also require that you have your home appraised to make sure that it hasn't fallen in value since you took out your mortgage.
Your lender will automatically remove PMI on the date when your principal balance is scheduled to hit 78% of the original value of your home. Your lender will send you a letter explaining that it has removed PMI when you reach this threshold. The letter will also state your new, lower monthly mortgage payment.
How much removing PMI reduces your mortgage payment depends on how much you are paying each year for this insurance. If you are paying $2,400 a year for PMI, removing it will reduce your monthly mortgage payment by $200.
3. Change Your Mortgage Loan Term
If you are paying off a shorter-term mortgage, such as a 15-year, fixed-rate loan, you can reduce the size of your monthly mortgage payment by refinancing to a loan with a longer repayment period, such as a 30-year, fixed-rate loan.
Your monthly payment will fall because you are stretching out the time it takes to repay your mortgage.
Say you are paying off a $350,000 15-year, fixed-rate mortgage with an interest rate of 4.5%. Your monthly payment, not including taxes or insurance, would be $2,677. If you owe $310,000 on that mortgage and you refinance that amount to a 30-year, fixed-rate mortgage with an interest rate of 6%. Your new monthly payment, without taxes and insurance, would be $1,858, or a savings of $819 a month.
There are some negatives here. You'll pay a significant amount more in interest if you refinance to a longer-term loan. With that 30-year, fixed-rate mortgage you'll pay a total of $359,489 in interest if you take the full 30 years to repay what you borrowed. If you stuck with the 15-year, fixed-rate loan at an interest rate of 4.5%, you'd only pay $131,982 in interest if you took the full 15 years to repay what you borrowed.
4. Recast Your Mortgage
Another less common option for reducing your mortgage payment is mortgage recasting. The challenge? You'll need a large sum of money to make a recast happen.
Say you come into extra money, whether through an inheritance, large bonus at work, royalty payment, legal settlement or from some other type of financial windfall. You can make a large lump-sum payment to reduce your mortgage loan's principal balance. This will lower the amount you owe on your loan and can also reduce your monthly payment.
If your lender agrees, it will recast, or rework, your mortgage after you make your big payment. Because you've reduced your principal balance by a significant amount, your lender might agree to lower your monthly payment.
Your loan's term won't change. If you took out a 30-year, fixed-rate mortgage, you'll still be left with a loan with a 30-year term. But because you reduced its principal balance, you'll need to pay less each month to pay off what you borrowed before your loan reaches its 30-year lifespan.
Before attempting a recast, talk to your lender to make sure they are willing to rework your loan after you make your payment.
5. Look For A Lower Homeowners Insurance Rate
When you apply for a mortgage, your lender will require that you also take out a homeowners insurance policy. Typically, you’ll pay a portion of your yearly homeowners insurance cost with each mortgage payment. If you can lower the cost of your policy, it will decrease your monthly expense.
Much of your policy cost is based on factors outside your control, such as the size of your home, its age and location. But can you lower the cost of your policy by taking such steps as adding a security system, giving up smoking if you are a smoker, installing roofing materials that offer added protection against hail and affixing wind-resistant shutters to your windows.
You can also lower how much you pay by changing homeowners insurance providers. If you shop for a new policy, you might land homeowners insurance at a lower rate.
6. Rent Out Part Of Your Home
It won’t lower your mortgage payment, but renting out a room or floor in your home will provide rental income each month that you can use to help cover your monthly mortgage payment. If you are struggling to cover your payment each month, this extra influx of cash could help.
You might consider a “house hack” of part of your home. Using this strategy, you’ll rent out a room or several rooms in your home while you share certain common areas – such as your kitchen and bathrooms – with your renters.
7. Appeal Your Property Taxes
Most lenders require home buyers to open escrow accounts when they take out a mortgage. With every mortgage payment owners make, a portion of their dollars go into this account. When owners’ property taxes and homeowners insurance payments are due, their lenders will make these payments on their behalf.
If you can lower your property taxes, you’ll also lower that monthly expense. Doing this isn’t easy. You’ll have to file an appeal with your county assessor. This office will then review your property taxes to determine if you are paying too much. A successful appeal could result in a lower property tax bill and, if you are paying into an escrow account each month, a lower monthly payment to your lender.
Getting Lower Monthly Mortgage Payments: FAQs
Wondering how to lower your mortgage payment? Here are some of the most common questions homeowners have.
How can I lower my mortgage payment if I’ve lost my job?
It can be difficult to cover your mortgage payment if you lose your job and the monthly income it provides. If you are struggling to pay your mortgage because of a job loss, immediately contact your lender and explain the situation. Your lender might approve a loan modification in which it temporarily lowers your payment. Your lender might also pause your loan payments through forbearance.
How can I lower my house payment without refinancing?
Refinancing a mortgage is the most common way for homeowners to lower their monthly mortgage payments, but it’s not the only way. You can also build enough equity to remove private mortgage insurance payments, recast your mortgage by making a big payment to lower its principal, shop around insurance premiums or appeal for a lower property tax bill.
Can I negotiate a lower monthly mortgage payment?
If you are struggling with your mortgage payment, you can ask your lender for relief. Lenders aren’t required to lower your monthly payment, but they might do so if you can prove you are suffering financial hardship and could make your payments on time if they were lower. Lenders are more likely to lower your payment if it is only a temporary measure.
Can I lower my monthly mortgage payment by paying extra principal?
Making extra payments directly to your loan’s principal balance can shorten the number of months it takes to pay off your mortgage. If you make enough extra payments, you could lower the amount of interest you pay by thousands of dollars. But extra payments won’t reduce your monthly payment. If you have a fixed-rate mortgage, that amount stays the same until you pay off your loan’s balance in full.
The Bottom Line
If your monthly mortgage payments are too high, you can take steps to lower them, either by refinancing, removing private mortgage insurance, lowering your property tax bill or reducing the amount you pay each month for homeowners insurance. If you’re looking for a lower interest rate or longer term for your mortgage, get started online with us.