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If you’re a homeowner looking to free up some money in your budget, you may want to consider ways to lower your mortgage payment. After all, housing is often one of your largest recurring monthly debts.
Think of it this way: a lower mortgage payment could mean more the ability to put more money toward important goals, like paying off debt or building your retirement fund. But how do you get there? What does it take to achieve a lower mortgage payment? It could be as simple as one of these strategies.
Reduce your interest rate
A lower rate can mean incredible savings. For example, on a $200,000 30-year-fixed loan, reducing the interest rate from 5% to 4% can mean a monthly savings of almost $120. Better yet, it can mean tens of thousands of dollars in savings over the life of your loan.
Think you don’t qualify? Think again. Black Knight’s recent Mortgage Monitor report shows that 80% of all mortgages originated in 2018 have an interest rate of at least 0.75% higher than current averages. Pre-2004 mortgages could also see significant savings.
Drop private mortgage insurance
Private Mortgage Insurance, or PMI, is required by most lenders if you’re unable to put down 20% of the appraised home value or sale price. It is specific to conventional loans and provides some protection for the lender in cases where the borrower may default on the home loan.
How much will you pay each month? Well, that varies based on how much money you put down, your credit score, and your insurer. If you are required to pay mortgage insurance, it will be included in the total monthly payment that you make to your lender, your costs at closing, or both. But once you reach enough equity to equal 20% of your home’s value, you can remove PMI. Be sure to stay on top of your loan-to-value (LTV) ratio. And remember, this is specific to conventional loans. If you have a mortgage insurance premium (MIP) on your FHA loan, these rules do not apply. Contact your lender to learn about your options or visit this article by the CFPB.
Make a larger down payment
If you have not yet secured a home loan and are still in the early stages of home buying, you’re going to want to think about your down payment. Can you put more money down? The more you can put down upfront means the less money you need to borrow. Of course, the smaller your loan, the less money you have to pay back.
A higher down payment also means you’re less likely to pay mortgage insurance. Generally speaking, 20% down is necessary to avoid PMI.
Extend your loan term
Another option to achieve a lower mortgage payment is to refinance to a longer loan. This technique, also known as “recasting,” could lower your monthly payment, but may cost you more in interest in the long run. Your monthly costs would go down, but you’d be paying more interest over the life of your loan. So, it’s at best, a last resort solution. Be sure to speak with a financial advisor before you choose to extend your loan term.
For many homeowners, refinancing can mean significant monthly and long term savings. With mortgage rates near historic lows, now may be a great time for a free mortgage review to see just how much you can save. At American Financing, you can schedule an appointment for a date and time that work for you.
Not yet ready to call a lender? Try a mortgage calculator so you can compare your current loan with new loan options.
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