Ways to Lower Your Monthly Mortgage Payment
If you have a mortgage your monthly mortgage payment likely has priority over everything else; if not, getting that mortgage and securing a low rate will be your main focus. It’s imperative, therefore, that you do everything you can to lower your mortgage payment.
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Not only will this make it easier to pay your bills every month, leaving more money for other bills and debts, as well as your savings and investments, but a low payment will make it easier to get a mortgage in the first place.
Mortgage lenders always take your debt-to-income ratio into account, which looks at your monthly outgoings and compares them to your income. If your agreed-upon mortgage payment is too high, your debt-to-income ratio will be too high, and your application may be refused.
With that in mind, let’s look at some of the ways you can reduce a monthly mortgage payment as a homeowner or homebuyer.
You probably already know about refinancing and have already skipped this section, accompanied by an eye-roll or two. However, it has to be mentioned because it’s one of the easiest ways to reduce your monthly mortgage payment.
Refinancing replaces your current mortgage with a new one, swapping an adjustable-rate mortgage rate for a fixed-rate mortgage, changing the term, lowering the interest rate, and generally making it more suitable to your current needs.
It’s worth noting, however, that a mortgage refinance will restart the amortization process and could delay the time it takes to clear the balance. You will also be required to pay closing costs and other fees, just like you did when applying for your current mortgage.
Furthermore, if you extend the term, you can reduce your mortgage payments, but you may also reduce the rate at which you make principal payments, thus slowing down your equity acquisition rate.
For example, if you have a 4% 30-year mortgage of $200,000, you’ll pay $954.83 a month before accounting for taxes and insurance premiums. In your first month, just 30% of your mortgage payment will go towards the principal and this will increase steadily until you reach the 12.5-year point, when your principal payments will outweigh your interest payments.
With a 40-year mortgage term, you’ll pay $835.88, but just 20% of that is the principal payment and you won’t reach that “halfway” point for over 22.5 years.
2. Government Refinance Programs
You can get a lower rate if you use a government refinance program, including Streamline Refinance programs from FHA, VA, and USDA. In addition to reducing your interest rate and monthly payment, you may also be offered home equity loans and a cash out refinance.
3. Increase Your Down Payment
Another “obvious” inclusion worthy of an eye-roll, but one that still needs to be said. Home buyers want to buy their homes quickly and with as little down payment as possible. They don’t have the time or desire to save more money and often underestimate just how important it is. However, as soon as they purchase their home and start making repayments, the truth sinks in, which is why the biggest homeowner regret is not increasing the down payment.
A higher down payment has two effects. Firstly, it reduces the amount of money you need to borrow, which in turn reduces the total interest you pay every month and during the term.
If you purchase a $200,000 house with a 3% down payment, you’ll have a mortgage loan of $194,000. At 4% interest over 30 years you’ll pay $926.19 a month; $139,425,48 in total interest and $333,425.48 altogether.
If you pay 20% upfront, you’ll bring that monthly payment down to $763,86 and pay $114,992.54 in total interest or $274,992.54 during the life of the loan.
In other words, $34,000 extra paid at the commencement of the loan is saving you $58,432,94 during its term and reducing your monthly payment by $162.33. And that’s not all. A bigger down payment increases your options and will likely lead to a lower interest rate. It also means you don’t have to pay Private Mortgage Insurance (PMI) which could cost you $100 per month until you buy 20% equity in your home.
All things considered, it could save you $80,000 to $90,000 and will ensure you have more equity right off the bat, which, in turn, will give you more options if you ever decide to refinance or acquire a home equity loan.
4. Increase Your Credit Score
Your credit score is an important part of the homebuying process and can help you to secure a better, bigger, and more favorable loan. Improving your credit score can also help you when it comes to refinancing and plays an important role in all other aspects of your finances.
There are a few things you can do to improve your credit score quickly and without a great deal of effort:
- Credit Utilization: Increase credit card credit limits and repay credit card debt to improve credit utilization, which accounts for 30% of your score.
- Avoid New Applications: All new applications can lead to hard inquiries, which may reduce your FICO score by up to 5 points.
- Don’t Open New Accounts: New accounts can impact up to 25% of your credit score, reducing your score by adding a new account and bringing the average age down.
- Repay Debt: The less debt you have, the better your credit score will be. Make extra payments when you can on any loan balance or credit card balance.
5. Loan Modification Programs
Loan modification programs can help individuals struggling with financial hardship. To apply, you need to be current with your payments or no more than two months behind. These programs can help you to secure a lower rate and a lower payment.
6. Check Your Tax Bill
Property taxes can account for over 1% of the total value of your home, and if your local authorities have incorrectly calculated the value then you’re paying more than you should.
Get a tax assessment and double-check to make sure they have noted everything correctly, including the number of rooms and square footage. You can contact them and request a change if they have made any mistakes.
7. Compare Insurance Policies
Homeowner’s insurance is essential to protect your new home and your belongings, but you don’t have to accept the first quote that you receive. Shop around and look for multi-policy discounts, as many insurers offer big savings when you purchase multiple policies, including car insurance and life insurance.
8. Rent a Room
It has never been easier to rent out a room in your house or to rent out the entire building when you’re going away. Roommate.com, Craigslist, and Airbnb can help you to find some temporary roommates, but make sure you check your mortgage contract first as primary residences are subject to rules concerning additional occupants and holiday rentals.