Refinance With A Lower Interest Rate
A lower interest rate can mean big savings. For example, on a $200,000 30-year-fixed loan, reducing the interest rate 1% can mean a monthly savings of almost $120.
If youre looking to lower your mortgage payment, keep an eye on the market. Look for rates that are lower than your current interest rate. When mortgage rates drop, contact your lender to lock your rate.
Another way to get a lower rate is to buy down your rate with points. Mortgage discount points are upfront prepaid interest paid as a part of your closing costs to get a lower rate. Each point is 1% of the loan amount. For example, on a $200,000 loan, one point would cost you $2,000 at closing. One mortgage point generally results in an interest rate reduction of .25% to .5%.
Whether discount points make sense for you is generally a matter of how long you plan to stay in the home. If you only see yourself in the home for a few more years, its probably less expensive to pay a slightly higher interest rate. However, reducing your rate by half a percent could save you thousands over the course of a 30-year loan.
Keep in mind that mortgage refinances are different from a mortgage recast, which is a lump-sum payment you pay toward your remaining principal. Both, however, may give you an opportunity to cut down on your mortgage bill.
Get approved to refinance.
Make Biweekly Mortgage Payments
If youre paid every other week, paying half your mortgage payment each time your check is deposited might make sense for your budget.
Not that this will lower your monthly payment, but it will do three other beneficial things:
- Each bite out of your budget will be smaller.
- You will shorten the life of your loan.
- You will build equity faster.
The magic is in the two extra payments you send , creating the equivalent of a 13th monthly payment, the last going entirely toward principle.
If this is your forever house, making biweekly payments on a 30-year fixed-rate mortgage will shrink your loan between five to eight years, saving tens of thousands of dollars in interest.
If its a house youll be leaving after a few years, a biweekly plan assuming it doesnt over-stress your budget will mean you recoup more equity when you sell.
You can enter into a biweekly payment plan on your own you dont need the lenders cooperation, or to enter into an expressed plan . Set up an autopay command for your checking account, and away you go although you may need to remind the lender about the last two payments of the year are to be applied against principle.
Consider Refinancing Your Mortgage
Refinancing a mortgage is when you take out a new mortgage to replace your current loan. Refinancing can help you save money and lower your monthly payment if you can qualify for a lower interest rate or a mortgage without PMI. You may also be able to lower your monthly payment by refinancing to a loan with a longer term.
For example, if you have 22 years left on your current mortgage and refinance to a 30-year mortgage, spreading out the payments over an extra eight years will lower your monthly payment amountat a cost. Depending on rates when you refinance, you may have to accept a higher interest rate than you currently have, and those lower monthly payments will also cost you an extra eight years in interest.
You’ll also need to account for the closing costs on the new loan when you refinance. It can take several years to break even, so refinancing might not be a good idea if you plan on moving soon.
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Streamline Refinances Can Be A Lot Easier
Even if youre not eligible for these programs or able to negotiate a lower rate, it might be possible to execute a streamline refinance.
As the name implies, its a faster and easier way to refinance a home loan for the express purpose of securing a lower interest rate.
This option allows you to refinance without the typical requirements like a minimum credit score or maximum LTV, and with limited paperwork. You might be able to skip the appraisal too!
Even though its technically still a refinance, it should prove to be a lot easier to qualify, and it shouldnt be as painstaking of a process.
Make A Request For Loan Modification
If you cannot afford your monthly mortgage payments and are in danger of falling behind on payment, contact your lender as soon as possible you may be eligible for loan modification.
Loan modification is the process of changing your loan terms without a refinance and lenders often work to help homeowners in need.
The government gives banks incentive to participate in modification program so dont overlook this option.
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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.
Can I Lower My Mortgage Payment Without Refinancing
So, youre stuck with a high monthly mortgage payment. But youd rather not refinance and pay thousands in closing costs.
How can you lower your monthly mortgage payment without refinancing?
One option may be a mortgage recast.
Recasting lets you reduce your monthly bill, and usually only costs a few hundred dollars in lender fees.
The catch? Youll need a large cash sum you can put toward your mortgage right now to lower the balance. Heres how a mortgage recast works.
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Put Your House To Work For You
If you have extra space especially if your house has a guest wing consider renting out a room. This could mean extra income that can offset your mortgage, tax, insurance and maintenance costs. This solution might work best if you know the tenant and can negotiate agreeable terms.
Another option, but only if you are a small business owner or self-employed and work from home, is to designate a room as a home office. You can deduct the room on your income tax return if it is used exclusively for business.
What about if your employer has you working from home to help flatten the curve during the COVID-19 pandemic? Sorry. If you are a W-2 employee, your opportunity to claim a home office deduction evaporated with the 2017 tax plan.
Contact a tax adviser before doing this, and be prepared to keep meticulous records. Were not suggesting you shouldnt do this. But few deductions trigger alarm bells faster or louder at the IRS than claims for a home office, so your case must be solid.
Reasons Mortgage Borrowers Refinance Their Loans
Since its next to impossible to lower your mortgage rate without refinancing, you might be considering whether a mortgage refinance is worth your time and money.
Refinancing your mortgage can serve a variety of needs, and not all borrowers refinance for the same purpose. Here are some common reasons to refi and scenarios when they might make sense for you:
Common reasons to refinance a mortgage
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Refinance To A Fixedrate Mortgage
Perhaps you have an adjustablerate mortgage , which offers a fixed rate for the first few years of your loan with a variable interest rate thereafter. While your rate may go down, it can also spike up, leading to much higher monthly payments than you can comfortably afford.
But if you refinance to a new fixedrate mortgage loan, you eliminate the uncertainty of variable rates and can possibly save more money over the life of your loan.
Say you have an adjustablerate 30year mortgage loan with a $200,000 original balance and a 2.5% interest rate that is about to jump, after your first five years, to a 3.5% interest rate, says Derks.
In this scenario, your monthly payment would increase from around $790 to approximately $881 nearly $100 more per month because of the rate adjustment.
But if you refinance to a new 25year fixedrate loan, which would not add any extra years to your term, and locked in at a 2.75% interest rate that rolls in your $4,000 closing costs, your monthly payment would be $830. This would allow you to save $50 per month compared to not refinancing.
Refinancing from an ARM to a fixedrate mortgage might not yield huge monthly savings. But it does give you additional financial security because you wont have to worry about your rate or payment increasing in the future.
Refinance To A Longer Term
Gaining more time to repay is another popular reason for refinancing. If you’ve made payments on a 30-year loan for a few years, for example, you could refinance the remainder back out to 30 years. This would likely result in a lower monthly payment amount.
But refinancing into another 30-year mortgage means you’ll pile on additional interest charges, especially if you’ve been making monthly payments for a significant amount of time. So, weigh the pros and cons of this option carefully to be sure that it’s the best way to reduce your monthly mortgage payments.
» MORE:Calculate your potential refinance savings
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Temporarily Pause Your Loan With Forbearance
You may also be able to pause your loan via forbearance if youve experienced a temporary hardship and loss of income.
The recent shutdowns due to COVID19 have prompted many borrowers to pause their loans. However, while a forbearance will allow you to postpone payments on your mortgage, it does not allow you to skip the payments altogether, says Laffey.
Indeed, when the forbearance period ends, youll have to repay any missedreduced payments or work with your lender on the most appropriate solution for repayment, according to your financial circumstances.
Thats why forbearance is not typically recommended, as it can prevent you from refinancing and impact your credit scores, cautions Derks.
Who Qualifies For A Refinance
Many borrowers who currently have a mortgage loan are eligible to refinance.
According to Khari Washington, mortgage broker and owner of 1st United Realty & Mortgage, the requirements for refinancing a loan are similar to those for purchasing a home. Washington says a lender will look at:
- Your debttoincome ratio
- Your credit score
- The equity in your home
- The stability of your income
- Your current home value
You should also understand the costs and benefits of a refinance to decide if its right for your situation.
Keep in mind that you will pay refinance closing costs, which are typically 26% of your loan amount. The average refinancing closing costs across the country are $5,749, per recent data from ClosingCorp, a real estate data and technology firm.
To find out if a refinance is worth it for you, compare your estimated closing costs with your monthly savings. If youll save more in the long run than you spend upfront, a refinance is typically worth it.
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How To Lower Your Monthly Mortgage Payment
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Money is tight, and youre looking for expenses to cut. Your mortgage payment is the biggest bite out of your paycheck, so that seems like a logical place to start.
Here are some options that may help you lower your monthly mortgage payment and important considerations about each one.
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.
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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 youre paying back.
Plus, if you put at least 20% down, youll 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 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 havent owned a home in the last two years, you may also be able to withdraw up to $10,000 from an individual retirement account 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.
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.
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Accomplishing Your Other Goals
If you choose to refinance to lower your monthly payments, you may also have the opportunity to make additional changes to your loan at the same time. Depending on your circumstances, you may also be able to switch to a fixed-rate mortgage or borrow from a portion of your available home equity. Talk to your lender about what youd like to accomplish and see whats achievable for your situation.
Look Into A Recast Instead Of A Refinance
Theres also the lesser-known loan recast, which like a refinance, can lower the monthly payments on your mortgage.
The difference is youre simply adjusting the amortization schedule of the loan.
Lets assume youve been paying extra each month to lower your outstanding balance, which is great for saving money long-term, but does nothing to lower subsequent monthly payments.
If you want your lower balance to be reflected in your remaining payments, you can request a recast from your lender or servicer, which will re-amortize the loan.
Then you should have lower monthly payments going forward, without a refinance or the closing costs that come with it. There may be a small recast fee though.
The beauty of the non-refinance route is that you also dont reset the clock on your mortgage. In other words, you dont extend the term with a fresh loan.
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Rent Out A Room In Your Home
This isnt the ideal scenario for most people. But when things are really tight, you can rent out a room in your home.
If you have a house and a spare bedroom, you could bring in an extra $500 a month or more to help reduce your mortgage payment. Get a room cleaned out and check Craigslist to research how much you should charge.
There are lots of sites where you can advertise your room for rent. Try easyroomate.com or roommate.com. Decide what you cant tolerate, such as a smoker, people with pets, etc.
It doesnt have to be a permanent situation, type up a 1-year lease, and at the end of it, you can decide to renew or kick them out.
How To Use A Refinance Calculator
There are many free refinance calculators readily available online which can help you determine if refinancing will save you money. With a refinance calculator, you can enter your current mortgage terms, the new proposed mortgage terms and any fees for refinancing. You can try this refinance calculator at LendingTree to see how it works.
A refinance calculator will help you figure out how much money youll save on a monthly basis and over the life of your loan, and whether its worth the costs of acquiring a new mortgage.
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