If you’ve ever wondered how to lower mortgage payments, there are several options to trim your mortgage bill — and not all require refinancing. If you’ve been paying your mortgage for years, you may be in a position to save by refinancing or canceling private mortgage insurance (PMI) if you have it.
For homeowners who are experiencing a financial rough patch, forbearance or a loan modification might provide some breathing room. New homebuyers can keep their monthly payments low by choosing an adjustable-rate mortgage (ARM), putting more money down, or working to improve their credit profile before closing on the home.
To learn how to lower mortgage payments, here are some approaches tailored to fit the needs of three types of borrowers.
How to lower mortgage payments for homeowners looking to save
If you’ve been making regular house payments for many years, your stable financial record just might help you save money on your mortgage, free up cash, and cut your overall interest costs.
Refinance your loan into a lower interest rate
Interest rates remain at near-historic lows, which means you could save quite a bit by refinancing. A new mortgage with a lower interest rate could trim both your monthly payments and your overall interest costs.
For example, let’s assume you’re 15 years into a 30-year fixed-rate mortgage on your $200,000 home, and your original interest rate was 4.5%. If you refinanced into a new 30-year loan with a 3.5% interest rate, you’d reduce your monthly payments by $418 while saving $118,944 in interest over the life of the loan. (That’s after taking into account around $2,000 in closing costs.) However, doing so would extend the time until you fully own your home by 15 years.
Another approach would be to refi into a new 15-year loan. At a 3.5% interest rate, you’d pay $66 less per month and save $111,110 in interest over the life of the loan. A mortgage refinance calculator can help you figure out potential refi savings.
Eliminate private mortgage insurance (PMI)
Mortgage insurance is typically a monthly cost, but the good news is that if you had to get PMI when you got the mortgage, you can cancel it once your mortgage balance falls to 80% of the original value of your home. If you’ve refinanced, you can use the appraised value — if it is higher, you’ll be able to get to 80% faster. Ask your mortgage company when this threshold is scheduled to be reached. You’ll be able to cancel PMI sooner by making additional principal payments to reach the threshold quicker.
The amount you pay in PMI varies, but in general cancelling it may save you around $30 to $70 a month for every $100,000 borrowed.
To cancel PMI, you must:
- Request to do so in writing
- Be current on your payments
- Have a good payment history
Your lender may require that there are no second mortgages or other liens on the property and that the property value hasn’t declined.
If you don’t request to cancel PMI, it should automatically drop off your bill once your principal balance reaches 78% of the original value (as long as you’re up to date on your mortgage payments).
You can also cancel PMI once you meet the midpoint of your loan repayment, for example, the 15-year mark on a 30-year mortgage. This option might be useful with an interest-only mortgage, a mortgage that has forbearance, or when a large balloon payment is required.
Government-backed mortgages, such as FHA loans, which allow down payments as low as 3.5%, have their own type of mortgage insurance premium, known as MIP. You are required to pay MIP for the life of the loan, except if your down payment was 10% or more. In that case, you can cancel MIP after 11 years. Otherwise, your only option to get out of MIP would be to refinance the FHA loan into a conventional mortgage without PMI once your LTV ratio is below 80%.
Shop around for cheaper homeowners insurance
Homeowners insurance is included in your monthly mortgage payment, so getting cheaper homeowners insurance will lower your house payment. The average cost of homeowners insurance is $1,249 per year, according to a report from the National Association of Insurance Commissioners, though your costs will vary widely depending on where you live, what your house is worth, the amount of coverage you select, your deductible, and a range of other factors.
You can shop around for a less-expensive homeowners policy by getting quotes online, asking friends for referrals, or checking with your insurance broker.
You can also call your current carrier and try changing the terms of your existing policy to lower your rate. Raising your deductible to $1,000, say, from $500 may cut your premium by as much as 25%, according to the Insurance Information Institute. There are other discounts you may be eligible for. Insurance companies may take off 5% to 15% if you bundle auto insurance with your homeowners policy and at least 5% off for installing smoke detectors, dead-bolt locks, or burglar alarms to improve the security of your home.
How to reduce mortgage payments for struggling borrowers
If money’s tight and you need some breathing room, you have options to reduce your monthly mortgage payments with or without refinancing. Even with less-than-perfect credit, your lender might be willing to work with you in the following ways.
Refinance your loan into a longer term
In addition to refinancing to get a lower interest rate, you can also get a longer repayment period to stretch out and lower the mortgage payments. For example, assume you have 10 years of mortgage payments remaining. If you’re short of cash or in danger of defaulting on your mortgage, refinancing into a new 20- or 30-year mortgage is one way to buy some time.
Of course, you’ll need to have enough equity in your home to qualify for refinancing. Plus, you’re likely to pay a few thousand dollars in refinancing costs or have them added to the principal of the new loan. Plus, you’ll be extending the number of years that interest accrues. However, it could mean a smaller check to write each month.
Apply for mortgage forbearance
If you’re facing short-term financial hardships, you may be able to ask for help in the form of a forbearance plan. Forbearance means pausing or reducing your mortgage payments for a period of time. This gives you a chance to catch up financially. You will have to repay the missed or reduced payments later, though not always all at once.
You can ask your mortgage company about possible forbearance if you are behind on payments or about to miss a payment. You’ll need to make a strong case that you’re experiencing a short-term hardship and explain why. Reasons could include job loss, disability, illness, divorce, or a death in the family. Mortgage companies may also offer forbearance if your difficulty is related to the COVID-19 pandemic.
Gather your loan information and documentation of your income and any other debts. Contact your mortgage company and say you want to see if you qualify for a forbearance. You can also ask for advice from a housing counselor approved by the U.S. Department of Housing and Urban Development (HUD). Find a HUD housing counselor at consumerfinance.gov/mortgagehelp or (800) 569-4287.
Apply for a loan modification
If you’re at risk of foreclosure, you should act quickly to find out whether you qualify for a loan modification. Loan modification is a type of loss mitigation through which you may be able to get more years to repay, a lower interest rate, or possibly a reduction of your principal owed.
It’s critical not to delay or ignore an overdue mortgage balance. Communicate with your lender about your financial difficulties and ask for assistance. The mortgage company must provide information about any programs you may qualify for to help you avoid losing your home. You can also get help from a housing counseling agency in negotiating with your mortgage company.
How to get the lowest mortgage payment when buying a home
Many new buyers want to keep their monthly payments as low as possible when buying a house. To get a lower mortgage payment when just starting out, make sure your credit profile is as good as you can make it and consider your choices about the type of mortgage and down payment you use.
Opt for an adjustable-rate mortgage (ARM)
An adjustable-rate mortgage (ARM) can significantly lower your monthly payment for the first years of the mortgage. ARMs typically start with a lower interest rate than fixed-rate mortgages. That means your payments will be lower at first than for a similar fixed-rate mortgage. The tradeoff with ARMs is that after an initial low rate, there is a risk that the interest rate — and monthly payments — could increase over time.
After the initial period — often between one month to five years — the interest rate on the loan can go up or down based on market benchmarks. Your interest rate and monthly payment will change every adjustment period, which could be a month, quarter, year, or even multiple years.
An ARM could be a reasonable choice depending on your circumstances — for example, if you plan to sell the house fairly soon, you expect your income to grow, or you plan to pay the loan off early.
Make a larger down payment
Another strategy: Save up a large down payment to enjoy a lower monthly payment. A larger down payment corresponds with a smaller mortgage amount. It also means a lower loan-to-value (LTV) ratio — the loan amount divided by the value of the home — which means lenders will consider you a lower credit risk. They’ll be more likely to offer you a mortgage at a lower interest rate, saving you on borrowing costs.
If you have the cash, try to put down at least 20% of the purchase price as a down payment. This saves you from the expense of mortgage insurance.
Tune up your finances before applying
If your credit history is not pristine, it can be smart to delay your home purchase. You can take a few months to work on improving your credit score, paying down existing debt, and saving up a larger down payment.
A better credit profile will help you qualify for a mortgage with a lower interest rate. That will save you money over the life of the loan.
If you have significant credit card debt or other loans, consider channeling any spare cash to making additional principal payments for a few months. Having a lower debt-to-income (DTI) ratio will make your mortgage application more attractive to lenders, improving your chances of a loan approval and better credit terms — and save you money on your house payment every month. If you’d like to learn more about your refinancing options, talk to a local Finance of America Mortgage Advisor today.