Switch From An Fha To A Conventional Loan
FHA loans require a higher mortgage insurance premium payments as compared to conventional loans . Lets take a closer look at MIP. It has two components: an upfront premium and an annual premium. The current upfront premium rate is 1.75% of the loan amount. The current annual premium is 0.85% for the most common category of FHA loans. Though, annual premiums can be lower for lower LTV values or mortgage terms of fifteen years or less. Regardless, its not an uncommon financial strategy for borrowers to refinance from an FHA to a conventional loan once the 20% equity requirement is met just so they can avoid further mortgage insurance payments.
Ways To Reduce Your Monthly Mortgage Payments
If you have found your way to reading this article because you are struggling to pay your mortgage, then our first piece of advice to you is to talk to your lender. Burying your head in the sand is never the answer and you could ultimately end up losing your home. Dont panic though, there are lots of things you can do.
Big picture
Your financial situation can change in a moment leaving you with a reduced income or different challenges to your budget. The best way to deal with such things is dependent on the expected timescale of the problem. For instance, if youve lost your job and the employment market is buoyant you may only need to move money around for a few months or maybe ask your mortgage provider for a payment holiday. If you have to take time off work to care for a sick relative, you may be facing months of reduced income. We dont have a crystal ball, but we recommend you proceed on worse case scenario basis because your lender will be much happier if you cut short a three-month payment holiday rather than being unable to make payments for a further six months. You may just want to reduce your payments to free up money for other things rather than finding yourself in trouble, which opens up your options. Whatever your reasons, please dont hesitate to get in touch with us here at Gemstone Mortgages so we can talk about all your choices and work out which is best for you.
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Finding The Extra Funds
Many homeowners do not consider making additional payments because they believe their budgets will not provide for extra funds. Yet, these same individuals may use credit cards to purchase big-ticket items such as televisions or the latest smart phone. They may not stop to calculate the monthly expense of a morning latte and scone. $6.00 spent every day on the way to work totals $120 monthly. A thorough analysis of the monthly budget can reveal many ways to save money that may be applied to the mortgage.
Tax refunds represent another source of additional funds to make payments on a home loan. Many taxpayers receive sizable refunds. These funds can be dedicated to the loan easily. Other sources can come from financial awards or settlements from insurance companies.
The speed at which a home loan can be retired varies depending on the extra amount paid and when it is applied to the principal. Making larger payments earlier in the term will save the borrower a considerable amount of interest. For example, for a $160,000 loan with 7 percent interest for 30 years, the payment would be $1064.40. Of that, only $131.83 is principal, and $932.57 is interest. If the consumer pays an additional amount equal to the principal, an entire month of the duration of the loan is eliminated.
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Get A Deal With Daily Interest Calculation
If the interest on your mortgage is calculated annually, you could still be paying interest on the parts of the loan you have paid off for almost a year after you have repaid it. Getting customers to pay interest on loans they have repaid is an outrageous practice and should be stopped but some mortgage lenders still practice it.
With daily interest calculation, every payment of capital you make will almost immediately start to reduce the interest payments you have to make. Over the term of a mortgage, mortgages with daily interest calculation will cost you thousands of pounds less than those with annual interest calculation.
Mortgage lenders are likely to be rather coy about calculating interest on an annual basis, so you will probably have to ask them outright.
Refinance To A Longer Term Mortgage
Getting a shorter loan term can help you pay off your debt faster, but they come with higher monthly payments.
For example, if you took out a 15-year mortgage a few years ago and realized the monthly payments are too high. Refinancing into a longer loan term can significantly lower your monthly payments.
Keep in mind:
Read On: Loan Modification vs. Refinance: How to Decide
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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.
Check Your Property Taxes
Most lenders also require you to make payments toward your property taxes in your monthly bill, which they keep in an escrow account. In general, homeowners have limited control over the amount they pay in property taxes. If you can persuade your local taxing authority to lower your property taxes, you could lower your mortgage payment too.
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Apply For A Mortgage Loan Modification
If youre experiencing long-term financial hardship, then asking for a loan modification might help lower your mortgage payments. Your lender might restructure your loan by extending the loan term, reducing your interest rate, or reducing your principal balance.
Tip:
Find Out: What to Do If You Fall Behind on Mortgage Payments
Be Part Of The Loan Modification
If you have a hard time managing your money and you dont think you can pay your mortgage on time, then one of the best options you may consider is to apply for a loan modification. This is the time when your lender will create some changes regarding your loan to somehow lessen your mortgages monthly payment.
Loan modification does not only welcome those borrowers who find it hard to pay their monthly mortgage. They also cater to individuals who are experiencing a hard time regarding their income reduction. So, if you are preparing for your retirement or you lost your job, you can apply for a loan modification.
Also Check: What Percentage Of Your Income Should Be For Mortgage
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.
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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How Can I Lower My Monthly Mortgage Payment
Due to the effect of the coronavirus pandemic on the U.S. economy, interest rates are still at record lows. This means homeowners who refinance in the next few months can shave hundreds off their monthly payment and effortlessly put more money back into their pocket each month, no couponing required.
Interested in viewing current mortgage refinance rates? Visit Credible to explore multiple rates and lenders in minutes.
For novice refinancers, there are many online mortgage calculators that can quickly illustrate the real figures of how much money you could be leaving on the table by not refinancing.
For example, say you bought a home in 2016 and want to refinance $300,000 to another 30-year fixed-rate mortgage. The mortgage rate you received in 2016 was pretty good at 3.75% but now you qualify for 2.75%. This difference of just 1 percent saves $263 on the loan each month and close to $15,000 on the life of the mortgage.
To understand just how much you could save on monthly mortgage payments by refinancing now, crunch the numbers and compare rates using Credible’s free online tool. Within minutes, you can see what multiple mortgage lenders are offering.
Its important to include any closing costs in your calculations, as this will impact when the new loan “breaks even” and the true savings can begin. The calculator we recommend here factors in these closing costs so consumers can weigh the true cost-benefit when evaluating mortgage options.
Make Extra Mortgage Payments
Another way you may be able to save money on interest, while reducing the term of your loan is to make extra mortgage payments. If your lender doesnt charge a penalty for paying off your mortgage early, consider the following early mortgage payoff strategies.
Just remember to inform your lender that your extra payments should be applied to principal, not interest. Otherwise, your lender might apply the payments toward future scheduled monthly payments, which wont save you any money.
Also, try to prepay in the beginning of the loan when interest is the highest. You may not realize it, but the majority of your monthly payment for the first few years goes toward interest, not principal. And interest is compounded, which means that each months interest is determined by the total amount owed .
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Extend The Length Of Your Mortgage
If you already own a home with a monthly mortgage payment youd like to lower, one strategy is to extend the length of your mortgage term. This is generally done by refinancing your home to pay off the existing mortgage with a brand-new one.
When you refinance, there are two ways to lengthen your mortgage. One is to simply start your mortgage again from the beginning, but another option is to change your loan repayment terms altogether.
Lets say youre currently seven years into a 30-year mortgage. If you refinance whatever principal is left on your current mortgage into a new 30-year mortgage, your monthly payments will drop because youre now spreading out the payments across a new 30-year period and at the same time starting with a lower principal since youve already paid off a portion of the original mortgage.
Or, if you currently have a 15-year mortgage, you could refinance into a new 20-year or 30-year home loan, thus lengthening your loan term and spreading your payments out over a longer timeline.
Related: Why you should get a 15-year mortgage and why you shouldnt.
How much can you lower your payment by extending your home loan? While the specifics will vary depending on your circumstances, a borrower who just started a 15-year mortgage for $250,000 with a fixed APR of 4% would fork over $1,849 per month in principal and interest. If that person switched to a 30-year home loan with the same APR, their payment would drop to $1,194 per month.
Next Step: Understand The Total Cost Of Borrowing
When considering a new loan or restructuring your current debts, remember to consider your borrowing costs. Extending the term of your loan may lower your monthly payment, but you may pay more in interest over the life of the loan, increasing your total payments.
Only one qualifying relationship discount may be applied per application. All loans are subject to qualification. To learn which checking accounts qualify, please consult a Wells Fargo banker.
Personal Loans: To qualify for a customer relationship discount, you must maintain a qualifying Wells Fargo consumer checking account and make automatic payments from a Wells Fargo deposit account. If automatic payments are not selected at account opening, or are canceled for any reason at any time after account opening, the interest rate and the corresponding monthly payment may increase.
Home Equity: To qualify for a customer relationship interest rate discount, you must maintain a qualifying Wells Fargo consumer checking account or mortgage relationship and make automatic payments from a qualified consumer deposit account.
Wells Fargo Bank, N.A. Member FDIC.
Also Check: Should I Refinance My 30 Year Mortgage
Can You Pay Off Your Mortgage Early
In most cases, homeowners can pay off their mortgage early, provided you follow certain ground rules and make sure the terms of your loan.
The first step is to recognize how your payment works. Early in a 30-year loan, the bulk of the payment goes toward loan interest. As the loan is closer to completion, the bulk goes toward the amount you borrowed, or the principal. But if the principal is lowered through extra early payments, the interest paid also is lowered. Paying down principal in the long run will reduce the total interest paid on the loan.
The more the principal is paid, the more the homeowner builds equity in the home. To easily figure the equity, calculate a fair price you feel the home is worth then subtract the loan balance. If a home could be sold for $300,000 and you have $150,000 left on the loan, you have $150,000 in equity.
When considering paying the mortgage early, be sure you know the answer to a question that many, especially first-time homebuyers, often do not consider: Is there a prepayment penalty on your loan? Many lenders do not have this penalty, but those that do will charge for making early payments. If you have any uncertainty, call your lender to ask specifically about prepayment penalty.
Once that question is answered, be sure to tell your lender if and when you make extra payments that you want that money applied to principal.
Refinance To A Lower Rate
Refinancing your mortgage to take advantage of lower interest rates is one way to lower your monthly payment.
Youll need adequate home equity to qualify for a refinance, in addition to meeting other requirements. Equity is the market value of your home minus what you still owe on the mortgage. Youll also need to be prepared to pay refinance closing costs.
Traditional guidance suggests refinancing is worth it if you can lower your rate by 1 percentage point. Its possible to meaningfully lower your monthly payment with a 0.5- to 0.75-point decrease, depending on how much the refinance will cost you and when youll reach the break-even point on those costs.
» MORE: How and why to refinance your mortgage
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Improve Your Credit Scores
Your 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 youve had any late payments in the last 12 to 24 months, you may want to wait until its been at least a year since your most recent late payment before you apply for a mortgage. Set your accounts on auto-pay, and remove your name from 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 .
