How to Lower Your Mortgage Payment
The most common way to lower your mortgage payment is to refinance your current home loan or make a bigger down payment if you’re buying a home. However, there are other ways to reduce what is usually your largest monthly expense.
We’ll explain those options below to help you find a good fit to shrink your monthly housing expense.
1. Refinance to lower your interest rate
One of the best ways to lower your mortgage payment is by refinancing your mortgage to get a lower interest rate. A mortgage refinance involves replacing your current mortgage with a new one.
There are plenty of refinance options to choose from. Some require the full vetting process you underwent when you first bought your home. The lender verifies your income and credit and requires a home appraisal to determine your home’s worth. There are also “streamline” refinance options that allow you to skip income documentation and don’t require appraisals.
Here are some refinance programs worth knowing about:
Conventional rate-and-term refinance. This type of refinance is also called a “limited cash-out refinance” and typically involves paying off your current loan balance with a new loan at a better interest rate. You can roll your closing costs into the loan, but keep in mind your monthly payment will be higher if you do.
FHA streamline refinance. Homeowners with a current loan backed by the Federal Housing Administration (FHA) can avoid the hassle of income documents and an appraisal with an FHA streamline refinance. One caveat: You’ll need to budget cash for your closing costs because this program doesn’t allow you to add the costs to your loan amount. However, some lenders may offer a no-closing-cost option if you’re willing to accept a higher interest rate.
VA interest rate reduction refinance loan (IRRRL). If you currently have a loan backed by the U.S. Department of Veterans Affairs (VA), you may be eligible for the IRRRL program if you’ve made your payments on time. This VA refinance program is only for eligible military borrowers, and you can add VA closing costs to the loan. No home appraisal or income documents are required. To prevent veterans from paying excessive closing costs, you must break even on those costs within 36 months.
USDA streamline assist refinance. USDA loans are offered to low- and moderate-income borrowers who purchase homes in rural areas, and are guaranteed by the U.S. Department of Agriculture (USDA). If you currently have a USDA loan, the streamline option lets you refinance without a credit review, income verification or appraisal. If you can save at least $50 from the refi and made your last 12 payments on time, you may qualify.
Use LendingTree’s mortgage refinance calculator to estimate how much you can save based on current interest rates.
2. Refinance to get rid of mortgage insurance
If you made less than a 20% down payment on a conventional loan or took out an FHA loan, you’re likely paying for mortgage insurance. You could easily be paying hundreds of dollars monthly toward mortgage insurance premiums, depending on the amount you put down and your credit score when you bought your home.
The good news is you can get rid of or reduce your monthly mortgage insurance cost with these refinance tips:
Refinance your conventional mortgage. If home values in your area are on the rise and you have a conventional mortgage, you may be able to remove or at least lower your monthly private mortgage insurance (PMI) premium. If you have at least 20% equity, you won’t need PMI at all. Even if you don’t, your mortgage premium will drop based on how much equity you have now compared to when you bought your home.
Refinance an FHA loan to a conventional mortgage. The most effective way to stop paying FHA mortgage insurance is to refinance your FHA loan to a conventional loan. However, check your credit scores first — conventional mortgages require higher credit scores than FHA loans.
Refinance and pay down your principal. A little extra cash may help you pay your balance down to 80% of your home’s value and avoid mortgage insurance altogether on a conventional loan.
3. Swap out a short-term loan for a long-term loan
A 15-year mortgage may be a great option to pay off your loan faster, but if the rate is putting too much pressure on your budget, refinancing to a 30-year mortgage may give you some much-needed payment relief. If you’re fretting about all the extra interest you’ll pay over time, take heart: You can always make additional payments down the road if your income increases or you receive cash windfalls like tax refunds or work bonuses.
4. Switch to an adjustable-rate mortgage
An adjustable-rate mortgage (ARM) offers a lower rate for a set time running between one month and 10 years, which may come in handy if you need to temporarily reduce your mortgage payment. Just be sure you understand the adjustments and have a plan for handling future monthly payment increases.
One tip: If you plan to sell your home in the near future, you can use your monthly ARM savings to pay down your loan balance each month, which will put more cash in your pocket when it’s time to sell.
5. Ask your lender about recasting your loan
If you’re happy with your current interest rate on your conventional loan but have an extra $5,000 to $10,000 to spare, you can request a mortgage recast. Rather than going through the refinance process, you’d use the extra cash to pay down your loan balance, and the lender would then reset the payment based on your current interest rate at the original loan repayment term.
You don’t have to qualify, and lenders typically charge a small fee for the process. This is a great option for homeowners who had to buy a new home before they sold their old home, but now have the profit from their old home to pay down their mortgage and reduce their monthly payment amount without all the costs and documentation of a regular refinance.
6. Shop around to save on your homeowners insurance premium
It’s not uncommon to see homeowners insurance premiums rise every year. You’re not required to stick with your current carrier if you can find the same coverage elsewhere at a lower price. Shopping for homeowners insurance is a relatively easy, with hundreds of companies competing for your business.
7. Dispute your property tax bill
If your home loan includes an escrow account, property taxes may make up a noticeable chunk of your monthly mortgage payment. As a homeowner, you can appeal a tax assessment with your local, county or regional tax board. Common reasons to appeal are errors in square footage, zoning or amenities.
Consult with a tax attorney to learn the deadlines for a property tax appeal. Ask about property tax exemptions — if you’re a senior or have a disability, you may be eligible for one.
8. Rent out part of your home
If you have an extra bedroom, basement or addition to your home, renting it out to a friend or trusted tenant can help you offset your monthly mortgage payment. This is called “house-hacking” and the extra income could create enough room in your budget to build up an emergency fund, pay down credit card bills or cover other expenses.
9. Ask about a loan modification
If you’ve recently lost your job or have faced another major life event that has affected your ability to make your mortgage payment, you may be eligible for a mortgage modification. Options may include extending your loan term from 30 to 40 years or lowering your interest rate.
You typically aren’t eligible for a mortgage modification unless you’ve missed a few mortgage payments. Stay in touch with your lender to avoid losing your home to foreclosure.