Recap: 9 Ways To Lower Your Monthly Mortgage Payment
To recap, here are 9 ways you can lower your monthly mortgage payment with or without a refinance:
The good news is that, with mortgage rates sticking near historic lows, many homeowners are still eligible to refinance.
I advise that you talk to a qualified mortgage planner or loan officer who can provide you with a mortgage plan that best meets your needs, Laffey recommends.
Keep in mind that lowering your interest rate even a fraction of a percent can generate surprisingly big monthly savings.
So even if youre not sure whether youd qualify, its worth talking to a lender about your options.
Tips For Getting The Lowest Mortgage Rate Possible
There is no universal mortgage rate that all borrowers receive. Qualifying for the lowest mortgage rates takes a little bit of work and will depend on both personal financial factors and market conditions.
Check your credit score and credit report. Errors or other red flags may be dragging your credit score down. Borrowers with the highest credit scores are the ones who will get the best rates, so checking your credit report before you start the house-hunting process is key. Taking steps to fix errors will help you raise your score. If you have high credit card balances, paying them down can also provide a quick boost.
Save up money for a sizeable down payment. This will lower your loan-to-value ratio, which means how much of the homes price the lender has to finance. A lower LTV usually translates to a lower mortgage rate. Lenders also like to see money that has been saved in an account for at least 60 days. It tells the lender you have the money to finance the home purchase.
Shop around for the best rate. Dont settle for the first interest rate that a lender offers you. Check with at least three different lenders to see who offers the lowest interest. Also consider different types of lenders, such as credit unions and online lenders in addition to traditional banks.
Finally, lock in your rate. Locking your rate once youve found the right rate, loan product and lender will help guarantee your mortgage rate wont increase before you close on the loan.
Not Everyone Wants To Refinance
Mortgage payments are the largest recurring monthly expense in many U.S. households, which is one of the reasons why the nation is experiencing a mini refinance boom.
Current mortgage rates remain stubbornly low and homeowners are exercising their right to a home loan refinance.
However, the ability to refinance wont be available to everyone. You may be recently self-employed or working through a tax lien, as examples.
The good news is that even without a refinance there are ways to make savings on your mortgage.
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How To Lower A Mortgage Interest Rate Without Refinancing
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If you do not want to refinance your mortgage, a loan modification might reduce your interest rate. However, for your lender to approve your modification, you will have to prove you are suffering financial hardship. Alternatively, you can tell your lender you are considering refinancing, preferably with another lender, and ask if they could lower your interest rate. Your lender might reduce your interest rate to keep your loan. However, this depends entirely on your lender. If you are struggling to pay your mortgage, a loan modification has a better chance of success.
Choose Your Loan Term Carefully
Short-term loans are less risky and, as a result, have lower mortgage rates. The trade-off for these kinds of loans are larger monthly payments since you’re paying off the principal in a shorter time. With a longer-term loan, you spread the payments over a longer period of time, leading to lower monthly payments with a higher interest rate.
Short-term loans will generally save you more money in the long run, but long-term loans may leave you with more disposable income every month. If you’re looking specifically for low mortgage interest rates and savings over the life of the loan, a short-term loan is your best bet.
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Apply For Mortgage Forbearance
If you experience a short-term financial setback and worry youll be unable to afford your monthly mortgage payment, a forbearance agreement may provide temporary relief.
Forbearance can temporarily lower your mortgage payments during a short-term financial hardship.
During mortgage forbearance, your lender may agree to suspend or lower your mortgage payments for a specific period of time. At the end of the forbearance period, payments resume as normal, and you may have to make up the missed amount in some way.
If youre interested in forbearance, its important to contact your lender before missing a payment, not after.
NerdWallet’s coronavirus resources page tracks the latest developments, including information on loan and payment relief, ways to cope and how to best manage your personal finances.
If you can’t make your full mortgage payment, or you’re worried that you won’t be able to make the payments soon, contact your mortgage servicer immediately. You may be eligible for mortgage forbearance, temporary relief in which the lender allows you to make lower monthly payments, or no payments at all, for a specified time. NerdWallet’s article about mortgage forbearance explains the basics.
See what types of mortgage relief programs are available to homeowners who are worried about making their house payments due to the coronavirus outbreak.
Remove Mortgage Insurance Payments
If you took out a conventional loan with PMI, or a government-backed FHA or USDA loan with a mortgage insurance premium , removing the insurance can lower your monthly mortgage payments.
With a conventional loan, the PMI will be automatically removed when you’re scheduled to reach 22% equitymeaning the principal balance is at 78% of the home’s original value. However, you can request to cancel PMI earlierwhen you reach 20% equity.
If you’re over 20% equity because your home’s value has increased, you may need to pay for a new appraisal and then request to cancel your PMI based on the current balance and value. Alternatively, you could refinance the loan and may qualify for a PMI-free mortgage.
For borrowers who took out an FHA loan after June 2013, the MIP will be removed after 11 years if you put at least 10% down. If you put less down with an FHA loan, or have a USDA loan, the only way to remove the MIP payments is to refinance with a different loan that doesn’t require mortgage insurance.
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When To Consider A Mortgage Recast
Joseph Polakovic is owner and CEO of Castle West Financial. He says many borrowers are good candidates for recasting.
This strategy makes sense for those who want to keep some liquidity and keep their current low interest rate while also lowering their monthly payment obligation, he notes.
These borrowers likely fall into the conservative investor category, adds Polakovic.
Their investments arent earning as much as their mortgage interest rate, so they are choosing to partially lower their monthly payment and liability without compromising their liquidity.
Leslie Shull is an assistant professor of real estate at Sacramento City College. She says a mortgage recast is a smart tactic for other people, too.
In my experience, people who chose to do a recast had recently inherited a large sum of money. Or they were getting ready to retire in five to 10 years and were paying down their mortgage to get their ducks in a row, explains Shull.
They had an interest rate that was better than current rates. So refinancing didnt make sense. By paying down the principal loan amount, these folks get to keep their same great rate and have a lower payment.
How To Pay Off A 30
A few options exist as realistic ways to pay off a mortgage sooner than the 30-year term.
Options to pay off your mortgage faster include:
- Adding a set amount each month to the payment
- Making one extra monthly payment each year
- Changing the loan from 30 years to 15 years
- Making the loan a bi-weekly loan, meaning payments are made every two weeks instead of monthly.
There are advantages to each approach. The choice comes down to careful study and a decision based on your financial position and the benefits of paying off a mortgage early.
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Can You Lower Your Mortgage Interest Rate Without Refinancing
November 5, 2018 by JMcHood
Typically, if you want a lower interest rate, you have to refinance. Even if you keep your loan with the same lender, they require you to apply for a new loan, pay off the old loan, and start fresh with the new loan with the lower interest rate.
There is one way that you can get away with getting a lower interest rate without refinancing, though. Its called a loan modification. This isnt for everyone, though. You have to be able to demonstrate that you are experiencing financial difficulties or hardships. If you can prove it, you may be a good candidate for the loan modification.
Switch From An Arm To A Fixed
When used wisely, an ARM can be an effective home loan option. Just be sure you know when the interest rate is scheduled to fluctuate. ARM rate changes tend to move upward, resulting in higher monthly payments for you. A good way to avoid this is to refinance out of the loan as youre nearing the end of the initial fixed-rate period.
Ensure you’re getting the best advice with these mortgage refinancing tips.
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How To Recast Your Mortgage
If you simply make a lump sum payment, your monthly payments won’t just automatically change because of it you’ll continue to owe the same amount. In that case, you would just end up paying off your loan a little earlier due to the lump sum you sent in.
However, you may have the option to have your monthly payments changed simply by asking your lender to recast your loan. If your lender allows this, they’ll recalculate a new monthly payment based on your new lower principal balance, thus reducing the amount you owe each month.
You will pay a small fee for this service — usually around $250 — but will get to enjoy those lower payments for the remainder of the time you’re paying off your loan.
Refinance To A Lower Interest Rate
The primary reason homeowners refinance is to lower their mortgage interest rate. This lowers your monthly mortgage payments but thats not all. It can also save you thousands over the full life of the loan.
For example, say you have a 30year loan with a $200,000 balance at a 3.75% interest rate, explains Eileen Derks, head of mortgages at Laurel Road. If you refinance at a 2.75% interest rate, youll lower your monthly payment by $100 and save $39,500 in total interest payments over the life of the loan.
If youve had your existing mortgage for over two years or if your finances have improved since you bought your home theres a good chance you could qualify for a lower rate and substantial monthly savings.
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You Can Make Changes In Your Payment
The length of a mortgage loan typically caps at 30 years. Throughout those years, the amount of interest you pay accrues .
At today’s mortgage rates, a 30-year fixed-rate conventional loan at the 2016 mortgage loan limit of $647,200 would require about three hundred thousand dollars in interest payments in order to pay of the loan.
Thats a lot of interest to pay.
These three methods below wont lower your payment today, but theyll yield significant long-term savings by chipping away your loans principal balance.
The smaller your balance, the less interest youll pay to the bank.
Grabbing A Lower Interest Rate
When market interest rates drop, refinancing to get a lower interest rate can lower your monthly payment, lower your total interest payments or both.
Another thing that can lower your monthly payment is paying interest on a smaller principal amount, possibly over more years.
In the first quarter of 2020, which mostly includes pre-pandemic refinance activity, 55% of borrowers who refinanced maintained their current principal balance or increased their balance by less than 5% , according to Freddie Mac data. This is the most common choice: a rate-and-term refinance.
A higher credit score will help you get a better interest rate on your mortgage. To get the best rates, youll need a credit score of 760 or higher. Almost 3 in 4 homeowners who refinanced in April 2020 had a credit score of 750 or higher, according to mortgage processor Ellie Mae. The average FICO score was 763.
Bringing cash to closing might also get you a slightly lower interest rate or allow you to avoid private mortgage insurance . Three percent of borrowers did this during the first quarter of 2020.
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Refinancing To Switch From An Adjustable
Some borrowers refinance because they have an adjustable-rate mortgage and they want to lock in a fixed rate. But there are also situations when it makes sense to go from a fixed-rate to an adjustable-rate mortgage or from one ARM to another: Namely, if you plan to sell in a few years and youre comfortable with the risk of taking on a higher rate should you end up staying in your current home longer than planned.
What Is A Loan Modification
When a lender agrees to modify a loan, they typically do so because you are facing default. Whether you are already behind or are about to become behind, the lender can modify the terms of the original loan to make the mortgage payments more affordable for you.
Lenders arent under any type of obligation to agree to a loan modification. If they do agree to modify your loan, though, they can change the interest rate, term, or even lower the principal balance in an effort to make your loan more affordable.
Lenders are sometimes willing to do this rather than face foreclosure. The last thing that banks want is to take possession of your home. They would rather than you stayed in it, but in order for you to do so, you may need more favorable terms, which is where the loan modification helps.
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What You Need To Know About Hamp
HAMP is the governments Home Affordable Modification Program. HAMP is for employed homeowners that are struggling to make their monthly payments. Getting a HAMP modification could cut your mortgage payment to 31 percent of your gross monthly income if you qualify. As with any government program there are conditions you must meet to get approved.
Heres the short list of the qualifications necessary for HAMP:
If you qualify for HAMP you will have an easier time getting your modification approved then by simply contacting your existing lender.
Many community-based credit unions like Navy Federal Credit Union may be much more willing to approve your loan modification outside of the HAMP guidelines than a faceless giant like Bank of America.
Home Equity Line Of Credit
HELOCs are lines of credit based on your home equity. They basically turn your equity into a credit card, and you can withdraw money as needed over an extended period of time. Youll usually make interest-only payments during the withdrawal period of10 to 15 years, and then start making larger monthly payments after that. HELOCs usually have variable interest rates, meaning your rate can rise over time.
Typically, HELOCs require higher credit scores than other equity products, though they may not have closing costs. You can also borrow between 80% and 90% of your equity. As with all other options, if you sell your home with a HELOC in place, your sale proceeds will go toward paying it off.
HELOCs are a smart option if youre not sure how much money you need, or you want access to cash over a long period of time. They can also be a good choice if you cant afford a large monthly payment right now.
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Eliminating Private Mortgage Insurance
You are likely paying private mortgage insurance, otherwise known as PMI, if you used a conventional loan with under 20% down or if you used a low down payment loan at the time of purchase. Because property values are rising, however, private mortgage insurance likely wont last forever. This is because increasing property values reduce a homes loan-to-value, or LTV, ratio, potentially placing you in the position to cancel your PMI immediately.
If you do go down this route, you will first have to contact your lender and request to have your PMI removed, which your lender will either approve or deny. If your request is denied, you can either reduce your LTV to 78% with a lump sum payment, thereby cancelling your PMI add a value-enhancing feature to your home and have an appraisal or request a new home appraisal.
