Cutting Down Your Monthly Payments
You could ask your mortgage lender if they will agree to cut down your monthly mortgage payments, usually for a limited period of time. This might get you over a rough patch and stop a debt from building up. If a debt has already built up, youll need to find a way to clear the debt as well.
For more information about clearing mortgage debts, see How to deal with mortgage debts.
Before you agree to make any changes to your mortgage, you should ask your lender if there will be any charge for this, such as a redemption or administration charge, and how much this will be. If the charge seems very high, you should get advice from an experienced adviser.
Depending on the type of mortgage you have, you may be able to:
- reduce your monthly interest payments. Your lender will probably only agree to this if there is equity in your property. This means that the property must be worth more than how much is owed on the mortgage
- change to interest-only payments
- reduce or stop repayment of the amount you borrowed temporarily
- increase the period of time over which the mortgage is paid. This would be more than just a temporary option and would mean you paid more interest in the long term.
For more information about how to ask your mortgage lender to cut down your monthly payments, see Dealing with your mortgage lender.
Extend Your Loan Term
Another option is to refinance and extend your term, which is the amount of time you have to pay off your loan. The advantage here is that you will lower your monthly payment and provide additional monthly cash flow.
Lets assume you have a current loan balance of $250,000, at a 3.25% interest rate, with 18 years remaining on your loan. Your current monthly payment is approximately $1,532, says Derks.
By refinancing to a new term of 30 years, still at a 3.25% interest rate, your new monthly payment would be approximately $1,088, providing extra monthly cash flow of about $442.
This strategy can work even if you already have a low interest rate. Just note, you could end up paying more in total interest. But if your main goal is a lower monthly mortgage payment, that might not matter.
Choose An Adjustable Rate Mortgage
When mortgage rates are super low, you might consider refinancing to an adjustable-rate mortgage to get a low initial rate and lower your mortgage payment. But before getting an ARM, consider if you can afford higher payments in the future. If mortgage rates rise before your rate resets, then the rate on your mortgage will increase, along with your mortgage payment.
Remember:Find out if refinancing is right for you
- Actual rates from multiple lenders In 3 minutes, get actual prequalified rates without impacting your credit score.
- Smart technology We streamline the questions you need to answer and automate the document upload process.
- End-to-end experience Complete the entire origination process from rate comparison up to closing, all on Credible.
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Benefits Of A Lower Monthly Mortgage Payment
The main advantage of lowering your monthly mortgage payment is that allows you additional household cash flow that can be used for several things, says Cindy Laffey, branch partner and mortgage planner at Inlanta Mortgage in Pewaukee, WI.
Laffey explains that saving on your mortgage can allow you to:
- Pay off other higher interest rate loans and credit cards faster
- Build a nest egg of savings for unexpected expenses and home repairs
- Increase savings for education and/or retirement
- Better managing increasing costs for property taxes and homeowners insurance
If you need some extra cash flow each month for these reasons or any other refinancing your mortgage could be a huge help.
Increase Your Credit Score
Your credit rating is directly tied to the interest rate you receive on a mortgage. If you have poor credit, not only will you get a high rate, you may not even be eligible to refinance in the first place.
If you improve your credit score, you can apply to refinance and get a lower rate.
Believe it or not, you can increase your credit score in a relatively short period of time by doing these 5 things.
- Pay down card balances
- Become an authorized user
- Remove your collection accounts and/or late payments
Pay down your credit card balances: Credit utilization is the ratio of your credit card balances compared to the credit limit. For example: If you have a credit limit of $10,000, and you have a $5,000 balance, your credit utilization ratio is 50%.
This is very high and will have a significantly negative impact on your FICO score. Its best to keep your utilization ratio below 15%. So if youre carrying high balances, pay them off and wait a few weeks for it to update on your credit report. When its reported, your scores will increase.
Get added as an authorized user: An authorized user is a secondary account holder who has the authorization to use the account.
If you know anybody with a credit card account established for a long time with positive payment history, ask them to add you as an authorized user on that account. When youre added, the entire account history will be reported to your credit history.
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Other Ways To Lower Your Mortgage Payment
If refinancing isnt the best option for you currently, there are a handful of other ways to lower your monthly mortgage payment:
- Rent out rooms in your home to long-term tenants.
- Consider listing the home on Airbnb.
- Sell your current home. Moving in the next few months would qualify you for a new mortgage at record low-interest rates.
- When buying a new home, put more money down to lower the amount you pay each month.
- Consolidate debt to a lower interest personal loan. With the extra savings each month you can put extra toward your mortgage, or to bulk up those emergency savings.
See what kind of personal loan rates you qualify for today to see if it makes sense for you.
Lowering your monthly housing payment carries a big financial impact. If the above ideas dont sound appealing, refinancing can often be the fastest route to savings, provided you find the right rate and lender. Investigate available refinance options in minutes by visiting Credible.
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Make Extra Principal Payments
Another way to pay off your home loan faster is to simply pay extra when youre able.
Most mortgage loans issued after Jan. 10, 2014, do not charge prepayment penalties.
This means you can pay extra money toward your mortgage balance each month or make a larger, lump sum payment on your principal each year without facing a penalty for paying off your loan early.
Many homeowners make extra payments on their loans principal when they get an income tax refund. Extra principal payments can have a big impact.
Heres an example.
- Lets say you took out a home loan for $300,000 on a 30year term and rate of 4%
- Thats a principal and interest payment of $1,370
- 360 payments of $1,370 per month means youll have paid $492,500 over the life of the loan thats $192,500 in interest payments over 30 years
Using the same numbers for the loan amount and interest rate:
- If you make extra principal payments of $250 per month, youd shave seven years and four months off your term
- And, youd save more than $59,000 total in interest payments
There are benefits aside from interest savings, too.
Paying off your mortgage early lets you use the money you would have paid each month for other purposes, like investing.
Lets continue with the example above. Instead of paying $1,370 per month on the mortgage, you could put the same amount of money in an investment account.
Ways To Lower Your Mortgage Payment
Modified date: May. 31, 2021
A high mortgage payment can account for a large amount of your income, leaving you with very little to cover the rest of your regular living expenses.
As a general rule of thumb, we recommend trying to keep your mortgage costs low, preferably under 30% of your take-home income.
If youre wondering how to lower your mortgage payments each month, there is more than one way to achieve that goal. Here are nine ways to reduce your mortgage.
Whats Ahead:
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Refinance To A Longer Loan Term
Another way to lower your mortgage payment is to refinance to a longer loan term. For example, if you have 20 years left on your mortgage and you refinance to a new 30-year mortgage, your monthly payments might go down.
However it is important to understand that doing this could increase the total amount you pay in interest over the life of your loan. Thats because you are paying back the money you own over a longer period of time. In this case, lowering your mortgage payment does not mean you are “saving money.”
If you are a current Freedom Mortgage customer, we can often help you keep your loan term the same when you refinance your home. That means we might be able to offer you a lower interest rate without adding years to the term of your new mortgage.
Remove Private Mortgage Insurance
You might also be able to lower your mortgage payment without refinancing. Eliminating private mortgage insurance , which protects the lender, can help lower your monthly payments.
You might be paying PMI if your down payment was less than 20% on a conventional loan, or have an FHA loan or USDA backed loan which both require PMI throughout the life of the loan. Either way, you might be able to ditch that PMI.
Heres how to get rid of PMI:
- Conventional loan: Contact your lender. PMI should automatically fall off once you have 22% equity in your home. But you might be able to ask your lender to remove PMI when youre scheduled to hit 80% LTV. This could happen earlier than anticipated if your home value has increased substantially.
- FHA or USDA loan: Youll need to refinance into a conventional loan, then ask your lender to drop PMI when you have 20% equity .
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Increase Your Mortgage Payment
Increase the size of your regular mortgage payment to take a large chunk off your mortgage principal. Choose a higher payment amount when you arrange your mortgage, or at any time during the term. This lets you pay down the principal faster.
Example: If you increase your monthly mortgage payment amount by $170 from $830 to $1,000, you’ll save almost $48,000 in interest over the amortization period. And you’ll own your home about 8 years sooner.1
Shop Around For Lower Homeowners Insurance Rates
If youre paying for your homeowners insurance as part of your monthly mortgage payment, then shopping for a better homeowners insurance rate could be an easy way to lower your overall monthly payment.
You can also review your coverages to make sure youre not overpaying for something you dont need. If you can afford it, raising your deductibles is a surefire way to make sure your premiums are lower. Just make sure you know what coverage your lender requires if youre reducing or eliminating anything. A good insurance agent should be able to help you find ways to save money while making sure all your bases are covered.
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Understand And Utilize Mortgage Points
Whenever people are curious about how much their mortgages cost are going to cost them, lenders will provide them with quotes that include loan rates and points. Stephanie McElheny, the Assistant Director of Financial Planning at Hefren-Tillotson in Pittsburgh, says that one point is equal to 1 percent of the loan amount .
McElheny adds, there are two kinds of points, discount and origination fees:
- Discount: prepaid interest on the mortgage the more you pay, the lower the interest rate.
- Origination fee: charged by the lender to cover the costs of making the loan.
If you plan on staying in your home for the foreseeable future, it may be worth paying for these points since youll end-up saving money on the interest rate of your mortgage. You could save that extra cash each month and put it towards your overall mortgage payment.
Downsize Your Home Or Sublet
If the above measures are not sufficient or viable, you can consider moving to a smaller and more affordable house, and reduce your liability. This is of course the last recourse, but it is an important option, especially if you fear foreclosure owing to your financial situation.
You can also explore the option of subletting a part of your house for some period until you can afford to meet your mortgage commitments on your own. This way you will get some temporary relief and would not have to let go of the house.
Professional mortgage brokerage firms can be of great assistance in evaluating these options to lower your monthly payments on mortgage and can provide you expert advice for choosing the right course of action.
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Get A Lower Mortgage Rate With A Streamline Refinance
This is the obvious answer to lowering your payment. However, if you have bad credit, you wont qualify for most types of refinance programs.
To refinance, lenders typically want to see at least a 640 FICO score. There are Government refinance programs available to help you get a lower rate without having perfect credit.
Extend Your Repayment Term
One of the simplest ways to reduce your monthly mortgage payments is by extending the duration of your mortgage term. Even though this way the overall cost of the mortgage over the entire tenure increases, your monthly financial pressure will be eased and you can feel more comfortable about your financial situation.
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Hit The Principal Early
Over the first few years of your mortgage, it may seem that you are only paying interest and the principal isnt reducing at all, says Nila Sweeney, managing editor or Property Market Insider. Unfortunately, youre probably right, as this is one of the unfortunate effects of compound interest. So you need to try everything you can to get some of the principal repaid early and youll notice the difference.
Every dollar you put into your mortgage above your repayment amount attacks the capital, which means down the track youll be paying interest on a smaller amount. Extra lump sums or regular additional repayments will help you cut many years off the term of your loan.
Downsides To Paying Off Your Mortgage Early
Most financial experts encourage homeowners to put their extra money into retirement accounts instead of paying off mortgages early.
The reason? For almost a century, the stock market has earned a 10% average annual rate of return. That means homeowners could potentially earn more by investing in the stock market than theyd save by paying down their mortgage balance.
Plus, some homeowners write off their mortgage interest payments as a tax deduction which means they could get some of that money back at tax time.
There are other potential drawbacks to consider before paying off your mortgage early:
Finally, before paying extra on the mortgage, many personal finance experts recommend building an emergency fund in case you lose a job, get injured, or face other financial troubles. Without emergency funds in a savings account, you may have to use higherinterest credit cards to pay unexpected expenses.
Questions to ask before paying off your mortgage early
Is paying off your mortgage early the best financial decision for you and your family? It depends on your unique situation and financial goals.
Here are a few questions to help guide your decision:
If your main objective is to be debtfree as soon as possible, then look into one of the five strategies above to pay off your mortgage faster. You may have already paid off other personal debt like student loans or credit cards it could make sense to target your mortgage, too.
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Overpay On Your Mortgage Repayments Whenever You Can
You can cut your mortgage payments in the long term if you are able to make overpayments whenever you can. Interest rates are at a historic low, which means there will never be a better time to get your mortgage down by paying more than your scheduled monthly payments by as much as you can afford to. By paying off more of your mortgage now, you will be in a better position when interest rates do start to rise, and the monthly payments start to hurt.
Low interest rates mean both that your monthly mortgage interest payments are less, leaving you with more flexibility to pay off the capital, and that interest rates on savings accounts are pathetically low. Also, you pay tax on interest earned on your savings, while your mortgage payments must be paid out of post-tax income, making it an even better deal to pay off the mortgage rather than save.
Check with your lender first that there arent any penalties to overpaying. Make sure there arent any other expensive loans or credit cards that need dealing with first, and once you have a rainy day fund for any problems, you can start using spare income to pay off your mortgage.
