Can I Lower My Mortgage Interest Rate Without Refinancing
Youve been a model borrower. Never missed a payment. Never been late. But you took out your loan in early 2011, and youve been pounding away on a 5% interest rate ever since. Now rates are almost two points lower.
But refinancing is a hassle proving your income, having your credit score probed, putting up with an appraisal, parting with some of your savings.
Youre thinking, maybe, if you ask, your lender will cut you a break.
Better think again.
Lowering the interest rate on a well-performing loan without refinancing is next to impossible. Instead, you have to be in trouble for your lender to listen, and even then, youre looking only at some of the less-desirable loan modification methods mentioned above.
Have Your Homes Tax Assessment Redone
If your home loan has an escrow, property taxes may take up a noticeable chunk of your mortgage payment each month.
Property taxes are based on each countys tax assessment of how much your home or land are worth. Some homes in urban areas are overvalued, causing the taxes to be 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 by filing with your county and requesting a hearing with the State Board of Equalization. If the protest is approved, your homeowners taxes will decrease along with your monthly mortgage payment.
Extending Your Loan Term When Refinancing
Refinancing can save you money in multiple ways, as it allows you to convert to either a shorter or longer loan term, depending on whats best for you. So if youre 10 years into a 30-year mortgage term, you could potentially refinance to a 10-year term and shave off 10 years. On the flip side, you could go for another 30-year term to lower your monthly payments.
However, loans with shorter terms tend to have lower interest rates, allowing you to both save on interest and reach full ownership much sooner. In some cases, though, refinancing could cost you more in the long run, especially if youre planning to extend your loan term. Before you refinance, its a good idea to crunch some numbers and figure out whether having a longer mortgage term really makes sense.
Dont forget closing costs either. If your lender agrees to let you roll those costs into your loan, you could end up paying more money. After all, youll now be on the hook for interest on a larger loan amount.
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Switch To A Cheaper Deal
Even if you avoided the SVR and got yourself a deal, its still worth comparing rates to see if you could save money by switching, especially if the value of your home has increased. When working out if you can save, dont forget to account for any extra costs such as Early Repayment Charges , valuation or product fees. But if the new deal is good enough, you could save money every month.
Saving Money By Getting Below Pmi Requirements
Mortgage companies require PMI when the borrower does not have 20% or more for a down payment. It is protection for the lender in case the borrower defaults on the loan. So, if a home was purchased with less than a 20% down payment, the bank is probably charging PMI. However, once the borrower owns 20% of the home, this charge could be eliminated. Some borrowers take out a second mortgage to bypass the PMI requirement.
Some banks may automatically charge for PMI until you loan-to-value is at 78%, but you can call them when your loan hits 80% to get PMI charges removed.
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Cancel Your Mortgage Insurance
Mortgage insurance is a fee that many homeowners pay every month with their mortgage payments. This fee protects your lenders interest if youre unable to repay your loan. Its typically charged if you bought your home with a down payment of less than 20% of the purchase price or refinanced into a new mortgage with less than 20% equity.
Canceling can be challenging, but if youre eligible, it will lower your payment, says Juan Rodriguez, a Zillow mortgage loan officer in Irvine, Calif.
Whether you can remove your mortgage insurance depends on:
- Whether you have a second mortgage or a home equity line of credit.
- Your lenders cancellation policies.
To request cancellation, you may have to pay for an appraisal. That could cost as little as $150 for an automated valuation or as much as $500 or more for a full appraisal.
Cutting Down Payments On Shared Ownership Properties
If you own your property through a shared ownership scheme, you will usually make a monthly payment towards your mortgage and a rent payment to a landlord. This is often a housing association, or some other kind of social landlord.
If youre having money troubles, you may be able to reduce your mortgage payments by selling back some of your ownership of the property to the landlord.
This is called flexible tenure. Not all shared ownerships schemes offer flexible tenure so you will need to contact your landlord to check if this is available. You will have to show that you’ve explored all other options first.
There may be other options available to help you sort out your mortgage or rent arrears.
If you have trouble in meeting your mortgage or rent payments or you are already in debt, you should get help straight away from an experienced debt adviser. A Citizens Advice Bureau should be able to help. To search for details of your nearest CAB, including those that can give advice by email, click on nearest CAB.
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Tips For Buying A Home
- A financial advisor can guide you through major financial decisions, like the purchase of a home. SmartAssets free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
- Securing a mortgage can be a stressful and confusing process. For starters, you need to figure out what term is best for you, whether you want a fixed or variable interest rate and where to get the best mortgage rates.
Purchase A Home You Can Afford
âIf you want to finance a home, youâll need to get prequalified first,â writes Mike Timmerman, who paid off his mortgage in just two years. âThe bank will look at your overall financial picture and spit out an amount that youre likely to get a loan for. Some people use this number to set a housing budget, but not me.â
âThe bank is just guessing. I examined my monthly budget and determined what I wanted to spend on housing,â Timmerman adds. â It ended up being much less than what the bank told me I could afford.â
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Mistake #: Not Asking If Theres A Prepayment Penalty
Mortgage lenders are in business to make money and one of the ways they do that is by charging you interest on your loan. When you prepay your mortgage, youre essentially costing the lender money. Thats why some lenders try to make up for lost profits by charging a prepayment penalty.
Prepayment penalties can be equal to a percentage of a mortgage loan amount or the equivalent of a certain number of monthly interest payments. If youre paying off your home loan well in advance, those fees can add up quickly. For example, a 3% prepayment penalty on a $250,000 mortgage would cost you $7,500.
In the process of trying to save money by paying off your mortgage early, you could actually lose money if you have to pay a hefty penalty.
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Request A Mortgage Loan Modification
A mortgage loan modification may be another way to lower your monthly mortgage payment without refinancing. However, while recasting might work for people who can make extra payments, loan modification is generally for people who are struggling to afford their payments.
If you’re having financial trouble, reach out to your loan servicer immediately, ideally before you miss a payment, to ask about hardship options. For example, a mortgage forbearance could allow you to skip a few payments if you’re experiencing a short-term setback. A loan modification is a more medium- to long-term solution as it permanently modifies the terms of your loan.
Examples of loan modifications include extending your repayment period to lower your monthly payment, decreasing the loan’s interest rate or reducing your loan’s principal balance.
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Extend Your Repayment Term
A simple way to lower your mortgage payment is to extend your term . You dont need to refinance your mortgage to do this because most lenders will simply offer this service for a fee of about $250.
If you extend your 15-year mortgage to a 30-year mortgage, your monthly mortgage payment will decrease since you have more time to pay back your loan by stretching out the term. While youll end up paying more interest on your mortgage over time with this option, its best for borrowers who need an immediate solution to cash flow issues.
Not Considering All Of Your Options
It can be very tempting if you come into some extra money to put that toward paying your mortgage off ahead of time. However, getting out of debt a little bit earlier may not be the most remunerative choice to make. To illustrate this, lets look at an example.
Lets say youre considering making a one-time payment of $20,000 toward your mortgage principal. Your original loan amount was $200,000, youre 20 years into a 30-year term, and your interest rate is 4%. Paying down $20,000 of the principal in one go could save you roughly $8,300 in interest and allow you to pay it off completely 2.5 years sooner.
That sounds great but consider an alternative. If you invested that money in an index fund that represents the S& P 500, which averages a rate of return on 9.8%, you could earn $30,900 in interest over those same 10 years. Even a more conservative projection of your rate of return, say 4%, would net you $12,500 in interest.
Everyones financial situation is unique, and its very possible that the notion of being out of debt is so important to you that its worth a less than optimal use of your money. The important thing is to consider all of your options before concluding that paying off your mortgage earlier is the best path for you.
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Switch To An Adjustable
An adjustable-rate mortgage 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 its time to sell.
Refinance To Lower Your Payment
Refinancing involves replacing your current mortgage with a new one that offers a lower interest rate. Several factors influence whether youll want to refinance. First is whether current interest rates are low enough to justify the fees and closing costs that come with a refi: Generally, youll want to see a difference of at least 0.5 to 1 percentage points. You also should ensure your mortgage has no prepayment penalty if it does, refinancing to lower your payment may not make sense.
The age of your mortgage is another factor: Many lenders wont allow refinances for loans that closed within four to five months, and may have other qualification requirements. But if your loan is recent enough that its amortization schedule still leans toward interest-heavy payments, it may be worth examining refinancing.
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Is It Wise To Pay Off My Mortgage With My 401
You might have a pile of cash sitting in your 401, but its never a good idea to use your retirement money to pay off your house. First off, youre going to need that money if you ever plan to retire. And second, youll be hit by taxes and a 10% early withdrawal penalty. So youll lose 30% or more of your money before you can even put it toward your mortgage.
About the author
Ramsey Solutions
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.
Dont Buy More House Than You Can Afford
Lets say you go the downsizing route. Before shopping for your next home, first make sure all your ducks are in a row and know how much house you can actually afford. This handy checklist is a great place to start. If you cant say yes to all six questions, its best to put your home purchase on hold.
- Am I debt-free with 36 months of expenses in an emergency fund?
- Can I make at least a 1020% down payment?
- Do I have enough cash to cover closing costs and moving expenses?
- Is the house payment 25% or less of my monthly take-home pay?
- Can I afford to take out a 15-year fixed-rate loan?
- Can I afford ongoing maintenance and utilities for this home?
If you need help figuring out what your new monthly mortgage payments will look like, try our mortgage calculator.
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Should I Refinance Or Just Pay Extra
With mortgage interest rates near record lows, refinancing your current mortgage might seem like a no-brainer. Millions of homeowners could lower their monthly payments and save on long-term interest.
But what if you already have an ultra-low rate? Or youre nearly done paying off your home loan?
In some cases, starting your mortgage over with a refinance wont make sense. Luckily, you can still save on interest and potentially pay off your home early by paying extra toward your mortgage.
Heres how to choose the right strategy.
Reduce Homeowners Insurance Premiums
Mortgage lenders require you to maintain replacement-value insurance on your home to protect their loan. But there are usually multiple insurance companies willing to write a policy, and some charge less than others for equivalent coverage. Periodically check with other insurers to make sure you have the best deal, and do some rate shopping tolower your homeowners insurance if you dont.
Study the various clauses and riders, too. Make certain youre not buying more coverage than you need.
Hint: Check with the company that insures your car. Companies often offer discounted bundled rates if you have more than one policy.
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Move To A Less Expensive Home
Sometimes, people wind up with more house than they can afford. If you decide that you cant afford your mortgage and other strategies wont work, consider selling.
Staying in a house you cant afford can lead to heartache, sleepless nights, and to default the worst outcome for your finances. If you sell, you can use the proceeds to buy a less expensive place, or you could invest the money and rent. Remember to factor in a real estate commission if you use an agency to sell your property.
Make An Extra Payment
Making an extra mortgage payment wont lower your monthly payment, but it will cut the total interest youll owe over the term of your loan. Making an extra payment every year could result in substantial savings and enable you to pay off your loan before the term ends.
This is the easiest strategy to lower the overall interest youll pay over the long term, Rodriguez explains.
Some homeowners choose to make one extra payment in the same month every year. Others make payments every two weeks instead of once a month. Bi-weekly payments also result in one extra payment every year.
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Making Extra Payments On Mortgage: Is It The Right Move
The short answer is, it depends. Some homeowners will want to explore the possibility of a future lower mortgage payment by paying down principal now. You may feel strongly that shortening the length of your loan is ideal. Or you may want to build wealth separately and save the difference. Essentially it comes down to a few financial and homeownership goals that help you either save time, money, or a little of both.
Not every homeowner will benefit from making an additional mortgage principal payment here and there. Before doing anything else, use the above extra mortgage payment calculator and see how much you may save in the long run.
Drop Pmi From Your Home Loan
While PMI can be dropped from your home loan automatically once you have at least 22% in equity, you may have a chance to stop paying PMI ahead of that if youre willing to pay for an appraisal in order to prove you now have at least 20% in equity in your property. The advantage of going down this route is that you dont have to go through the hassle of refinancing in order to lower your monthly payment.
However, if you know you have 20% equity in your home, you might prefer to refinance with a new lender altogether, perhaps to stack several of the above techniques into a new mortgage. In this case, having 20% equity in your property could leave you with a new home loan with no PMI and potentially even better rates and terms.
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