How to Lower Your Mortgage Payment
Your mortgage is usually the largest monthly payment you have. But if it’s too high, it can cause you a lot of stress and prevent you from accomplishing other financial objectives, like saving for retirement or a child’s college education.
There are a number of steps you can take before and after you buy a home to make your mortgage payment as low as possible. We’ll discuss some strategies that will help you lower your mortgage payment. We’ll cover:
- Getting the lowest payment before you buy
- Lowering your mortgage payment while closing on the loan
- How to lower your payment if you already have a mortgage
Getting the lowest payment before you buy
If you want the lowest mortgage payment possible, one of the best things to do is determine the largest monthly payment you feel comfortable with, before you get preapproved for a mortgage. This often is similar to the amount of rent you are paying at the moment.
But you’ll also need to factor in things like maintenance and repairs, and budget for any upgrades or improvements you might want to make to your home — like adding a pool or renovating a kitchen. Rather than getting preapproved for the maximum payment you qualify for, decide on a threshold that you won’t go beyond before you start looking at homes.
The emotional pull of a new home can make it easy to rationalize spending more than you feel comfortable. The last thing you want is to have buyer’s remorse with a purchase as big as a home. By doing a little extra planning to get the lowest payment possible before you buy a home, not only will you save money every month, but thousands of dollars over the life of your loan.
Lowering your mortgage payment while closing on the loan
Once you have your budget finalized and dream home picked out, there are a number of ways you can get your monthly payment lower as you finalize the mortgage.
Make a larger down payment
The easiest way to keep your mortgage payment lower is to borrow less money. Making a large down payment is a way to keep your loan amount as low as possible. The smaller your loan, the less you’re paying back.
Plus, if you put at least 20% down, you’ll avoid having to pay any private mortgage insurance on a conventional loan. Private mortgage insurance is required if you make less than a 20% down payment, and it makes your monthly payment higher until you reach that threshold.
Below are some options for making a bigger down payment.
Tap into retirement savings. You might want to consider borrowing from your 401(k) to boost your down payment. In most cases the payment will be deducted from your pre-tax earnings, and paying this back could be much less than the mortgage insurance you would pay by putting less than 20% down.
If you are a first-time homebuyer or haven’t owned a home in the last two years, you may also be able to withdraw up to $10,000 from an individual retirement account (IRA) without any penalty. The $10,000 is a lifetime maximum, so be sure you review the long-term cost of taking that money out of the market with a financial planner before you choose this option.
Sell an asset. You can sell a car, boat, RV or other assets you own to contribute toward a down payment. You’ll have to keep all the paperwork related to the sale — proof you owned it to begin with, something proving it was worth what you sold it for, a sales contract, and documentation of all of the funds exchanging hands from the seller to your bank account.
Get a gift from a relative. If you have grandparents or an uncle or aunt who have expressed interest in helping you with your home purchase, they can contribute a gift toward your down payment. They will need to provide some documentation to prove where the money is coming from, so make sure you let them know that when you are discussing the gift.
Improve your credit scores
Your credit scores are the most important factor when determining what type of interest rate you will get on your mortgage. The higher your credit scores, the lower your rate and mortgage payment.
If you are taking out a conventional mortgage, your credit scores also determine how high your private mortgage insurance premium will be. There are basic steps you can take to improve your credit before you start applying for mortgages to keep your interest rate and payment as low as possible.
Make sure all your payments are on time. Your payment history has the most impact on your credit scores, so if you’ve had any late payments in the last 12 to 24 months, you may want to wait until it’s been at least a year since your most recent late payment before you apply for a mortgage. Set your accounts on auto-pay, and get your name of off any co-signed accounts with relatives that you know might have challenges making on-time payments.
Keep your credit card balances low. The lower the balance is, the better your credit scores will be. The credit scoring system will provide the optimum scores if you keep your credit balances at no more than 30% of your limit on any credit card account.
Ask your loan officer about a credit rescore. You may have recently paid off a credit card balance, or had an unusually high balance at the time the credit report was run. This could have a temporary negative effect on your credit that could be fixed with a credit rescore.
It can take 30 to 60 days for your credit to reflect the correct balance on an account you recently paid down, which may be too long if you’ve got a house you’d like to make an offer on. The rescoring process often only take three to five days from the time you provide the paperwork, making it a great option for a fast improvement to your scores.
Meet with an approved credit counseling agency. There are a number of credit repair companies that will charge a fee for credit repair services, but there are also free credit counseling agencies in cities and states across the country. You can get a list of approved credit counselors at this website.
Reduce your mortgage insurance
One of the unique things about private mortgage insurance for conventional loans is there a number of different ways you can pay for it besides the traditional monthly payment. If your seller is paying any closing costs, you may even be able to have the seller buy out the mortgage insurance in one lump sum payment.
Here are some options for reducing your mortgage insurance when you buy your home.
Pay the entire premium at closing. Instead of paying monthly, private mortgage insurance companies give you the option to pay the entire premium at closing, so you won’t have a monthly mortgage insurance payment on the new loan. If the seller of the home you’re buying is willing to give you a credit to pay some of your closing costs, you can use the credit toward the mortgage insurance premium.
Pay premium upfront and monthly to get a lower monthly insurance rate. This is an option if you don’t have the resources to pay the entire mortgage insurance premium. This usually involves paying a lump sum toward a lower premium, so you end up with a smaller monthly mortgage insurance payment.
Choose an adjustable rate mortgage (ARM)
Most borrowers prefer the stability of a 30-year fixed rate mortgage. But many lenders offer adjustable rate mortgages, also known as ARMs, that provide a lower interest rate and lower monthly payment for a set period of time.
The standard ARM periods are three, five, or seven years. Depending on how long you want or need the lower payment, these can be a temporary way to get a lower monthly payment.
Be sure you understand how the loan will adjust after the initial fixed rate period. Adjustable rates are called “adjustable” because the rate is tied to an index, such as the London Interbank Offered Rate (LIBOR) or Cost of Funds Index (COFI) that can rise and fall depending on the economy and other financial market conditions.
There will be limits on how much the payment can increase after the initial fixed rate period is over, how much it can go up after that every adjustment period, and a lifetime cap as well. Discuss the mechanics of any ARM with your loan officer to make sure it’s the best choice for the length of time you want to have a lower payment.
In some cases, you might also consider an interest-only mortgage.
With a traditional mortgage like a 30 year-fixed loan, every month you make a payment a portion of goes to paying down the balance, called principal, and the other part to interest, that goes to the investor. This type of payment schedule also known as a “fully amortizing,” and as time goes on, you eventually pay more principal than interest until the loan is paid off.
There is a mortgage that allows you to just pay the interest for a specific period of time, and no principal, called an interest only (I/O) mortgage. During the interest only period your payment will much lower than a fully amortizing loan since you are only required to pay the interest, and no principal.
It’s important to understand what happens to your loan balance and payment after the interest only period is over. First of all, your loan balance will not go down, which means you won’t be paying the loan off at all — only the interest that is accruing each month.
After the interest only period is over, usually within five to 10 years, the entire balance is due and payable based on the remaining term of the loan. If you take out an interest-only loan with a 10-year interest-only period but a 30-year term, after the I/O period is over, the remaining balance would reset based on the 20 years remaining — increasing your payment substantially.
How to lower your payment if you already have a mortgage
If you already have your mortgage, there are still plenty of things you can do to lower your current monthly mortgage payment.
Refinance your mortgage
One of the best ways to lower your mortgage payment is by refinancing your mortgage. You can utilize our refinance calculator to estimate how much you can save and how your mortgage payment would drop based on current interest rates.
Depending on the type of loan you originally took out, there may be some “streamline” options that don’t require as much loan paperwork as you needed to get your purchase loan. That includes not having to verify income, and in some cases, not needing an appraisal on your home.
We’ll briefly discuss the refinances available to lower your payment.
Conventional rate and term refinance. If you took out a conventional loan through a Fannie Mae and Freddie Mac lender, you may be able to refinance to a lower rate to lower your monthly payment. This is the most common type of refinance, and is an easy way to save money.
If you’ve been watching rates recently and noticed they are dropping, now may be the time to shop for a rate and term refinance.
FHA streamline refinance. If you’ve had your current FHA loan for at least seven months and have made your payments on time, you may be eligible for an FHA streamline refinance. You won’t be required to provide any income documentation, and only need to verify enough assets for the closing costs.
The streamline also doesn’t require an appraisal, so FHA streamlines can be done very quickly and without very much documentation. As long as you are saving enough for it to make sense to do the refinance, this may be a great option, as long as you currently have an FHA mortgage.
VA Interest rate reduction refinance loan (IRRRL). Similar to the FHA streamline refinance program, the VA IRRRL allows qualified veterans to get a lower rate once 210 days has elapsed since their first payment. Payments have to be on time, and you need to breakeven on the closing costs within 36 months to be eligible.
This breakeven time requirement is unique to VA loans. You can calculate this by dividing the total closing costs by the amount of money you are saving — the number cannot be higher than 36.
No appraisal is required, and income and employment just have to be stated but not verified. Like the FHA streamline loan, you’ll only need to verify enough funds to cover the closing costs.
USDA loans. The USDA home loan program is offered to low- to moderate-income borrowers in eligible rural areas throughout the United States. Like other government loan programs, the USDA offers a streamlined refinance program called streamlined assist.
No new appraisal is needed, and there is no income or credit review. The lender only needs to be able to verify that the payment was made on time the last 12 months, and that the borrower is saving at least $50 per month.
Get rid of or lower your PMI
If you bought your house and put down less than 20% as a down payment, you are probably paying mortgage insurance on top of your regular mortgage payment. Over the life of a loan, this can cost you thousands of dollars.
The good news is there are ways you can get rid of PMI.
Just keep making payments. The first is to keep making payments on your current mortgage until you get to 78% of your original balance. You won’t have to do anything, because federal law requires the mortgage insurance be removed once you get to the 78% milestone on your payment schedule.
Request to have mortgage insurance removed. The other option is to request that your lender remove the mortgage insurance because your house has gone up in value enough to have 20% worth of equity. Equity is the difference between your loan balance and the value of your home, and if you live in a popular neighborhood, your home’s value may have gone up substantially since you bought it.
You’ll probably have to pay for an appraisal, but it may be worth the expense if you can permanently remove mortgage insurance from your monthly payment.
Request a recast of your loan
Another way to lower your monthly payment is to request a mortgage recasting. You’ll need to pay at least a minimum of $5,000 to $10,000 toward your current loan balance, and then request the lender “recast” your loan at the lower balance.
This is a great strategy for borrowers who were unable to sell their current home before they bought a new one, and didn’t have other resources to make a larger down payment. Once they do sell their old home, they can use the funds from the sale to pay down the mortgage and recast the lower loan balance, which translates to a lower new mortgage payment.
This option isn’t available on government loans, so if you have an FHA or VA loan, you’ll need to do a regular refinance to pay down the balance for a lower monthly payment.
Dispute your property taxes
If your home loan has an escrow account, property taxes may take up a noticeable chunk of your mortgage payment each month. Property taxes are based on each county’s tax assessment of how much your home or land is worth. Some homes in urban areas can be overvalued, causing the taxes to be too high. The assessment is different from an appraisal since it is conducted by your county for tax purposes only.
As a homeowner, you can request to have the assessment done again or protest it by filing with your local, county or regional tax board. The most common reasons to appeal are because of errors in square footage, zoning, or amenities.
You may want to consult with a tax attorney so you what the deadlines are for a property tax appeal, and to determine whether or not the time and effort will even be worth it. Be sure you know about tax property tax exemptions in your area as well — you may be eligible if you are a senior citizen or are disabled.
Shop for new homeowner’s insurance
The other part of your escrow payment is your your homeowner’s insurance premium. It might not be one you check very often — but it can be subject to sudden increases. It’s not uncommon to see premiums increase from year to year.
With hundreds of different homeowner’s insurance companies competing for your business, it may be time to shop again, even if your current homeowner’s insurance premium hasn’t gone up.
Rent out part of your home
If you have the extra space, having a tenant can greatly reduce the cost of your monthly mortgage payment. If you have an extra bedroom, basement, or addition in your home, consider renting space out to a friend or trusted tenant who can pay you rent each month.
Even if it’s just $300, that will help to at least offset your monthly mortgage payment, especially if you are starting to feel like the payment is too much, or have other unexpected expenses.
Talking to your lender about a loan modification
If you have recently lost a job, or had some other major life event that has affected your ability to repay your mortgage, you may be eligible for a mortgage modification. They may be willing to extend the term of your loan from a 30-year fixed to a 40-year fixed to help you to lower your payment.
However, this may come at the expense of a notice on your credit report that you didn’t pay as agreed. You also may not be eligible unless you’ve missed a few mortgage payments, but either way it’s important to stay in communication with the lender so you don’t risk a foreclosure.
It’s always best to take as many steps as you can to start off with the lowest mortgage payment possible, so you don’t have to spend extra time and money later on a refinance. Taking a little longer to buy a house to save up for a bigger down payment will always make your mortgage payment more affordable.
If a higher down payment isn’t in the cards when you buy your home, at least you will have many options to choose from to lower your payment in the future.