Potential Benefits Of Lowering Your Payments
Lowering your monthly mortgage payment by refinancing to a lower rate or extending your loan term can make it easier to pay your mortgage on time every month while also possibly covering your other debts and expenses. And if youre concerned about your ability to make your current mortgage payment in the future, lowering your monthly payment now can help relieve that pressure.
Should You Pay Off Your Mortgage Early Or Refinance
Do you want to pay off your mortgage faster because youre worried about how much youre spending on interest?
If youre simply concerned about your mortgage interest rate, consider refinancing to a lower rate and maybe a shorter term instead of making extra payments on your existing mortgage.
But if you already have a competitive interest rate and an ideal loan term, you probably dont need to refinance. You may be tempted to pay less interest by paying off your mortgage faster.
As you make your decision, consider whether you could earn more investing in securities than youd save by paying down your mortgage balance more quickly. Investing that money in a tax-preferred IRA could offer more financial peace of mind than owning your home outright sooner.
Any kind of investing can be risky. Check with a personal financial advisor before making any big moves if youre not sure about the risks youre taking.
Are Mortgage Points Right For You
Buying mortgage points is a way to pay upfront to lower the overall cost of your loan. It makes the most sense if you plan to be in the home for a long period of time. The amount youll save each month is likely to make the upfront cost worth it.
For many borrowers, however, paying for discount points on top of the other costs of buying a home is too big of a financial stretch, and buying points might not always the best strategy for lowering interest costs.
It may make financial sense to apply these funds to a larger down payment, says Boies.
A bigger down payment can get you a better interest rate because it lowers your loan-to-value ratio, or LTV, which is the size of your mortgage compared with the value of the home.
Overall, borrowers should consider all the factors that could determine how long they plan to stay in the home, such as the size and location of the property and their job situation, then figure out how long it would take them to break even before buying mortgage points.
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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
Buy Down Your Interest Rate With Points
Having excellent credit will help you to qualify for a lower interest rate, resulting in a lower mortgage payment. But if you do not qualify for the lowest rate, consider buying down your rate with mortgage discount points. This is essentially prepaid interest that can roll into your closing costs. One mortgage point is 1% of the loan amount and can lower your interest rate by 0.25% to 5%.
Carefully consider this option, as the upfront cost can sometimes outweigh the long-term savings if you are not planning to stay at the location for too many years. It can be less expensive overall to pay a higher interest rate for a shorter amount of time in certain cases.
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Make One Extra Mortgage Payment Per Year
Many homeowners choose to make one extra payment per year to pay off their mortgage faster.
One of the easiest ways to make an extra payment each year is to pay half your mortgage payment every other week instead of paying the full amount once a month. This is known as bi-weekly payments.
When you make bi-weekly instead of monthly payments, you end up adding one extra payment each year.
However, you cant simply start making a payment every two weeks. Your loan servicer could be confused about getting irregular, partial payments. Talk to your loan servicer first to arrange this plan.
You could also simply make a 13th payment at the end of the year. But this method requires coming up with a lump sum of cash. Some homeowners like to time their extra payment with their tax return or with a yearly bonus at work.
However you arrange it, making an extra payment each year is a great way to pay off a mortgage early.
As an example, if you took out a mortgage for $200,000 on a 30-year term at 4.5%, your principal and interest payment would be about $1,000 per month.
Paying one extra payment of $1,000 per year would shave 4½ years off your 30-year term. That saves you over $28,500 in interest if you see the loan through to the end.
Paying down your mortgage balance quickly has other advantages, too.
The Bottom Line On Lowering Your Mortgage Payment
You may be able to lower your mortgage payment by refinancing to a lower interest rate, eliminating your mortgage insurance, lengthening your loan term, shopping around for a better homeowners insurance rate or appealing your property taxes.
If a refinance is the path you choose for lowering your mortgage payment, then Rocket Mortgage® can help. With Rocket Mortgage, youll be able to see your options and understand just how much money you could save every month. Start your mortgage refinance application online now!
Get approved to refinance.
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Why Pay Off Your Mortgage Early
Few people keep a 30-year loan for its full term. In fact, homeowners stay put just 13 years on average and their loans might have an even shorter lifespan if they refinance at some point.
Homeowners who plan to sell their home or refinance soon usually arent concerned about paying off their mortgage early.
But what about homeowners who stay put for the long haul? Those 30 years of interest payments can start to feel like a burden, especially compared to the payments on todays lower-interest-rate loans.
You may find yourself wondering how to pay your mortgage off faster so you can live debt-free and have full ownership of your home.
Here are five strategies you can use to meet those goals.
Are There Other Ways To Save On Interest
Yes! Consider applying any extra funds at the end of the month toward your loan balance. Even paying an extra $50 or $100 a month allows you to pay off your mortgage faster.
Another idea is to refinance to a 15-year mortgage. Though your payments will be a bit higher, your overall savings will be greater. The shorter loan term also means that youll pay off your home loan in a fraction of the time.
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How Long Do You Plan To Keep The Mortgage
As when you purchased your home, you will have to pay closing costs on your refinance. If youre planning on selling your house in a few years, you may barely break even by refinancing. How come?
If the monthly savings for the remainder of your mortgage are not greater than the closing costs associated with the refinancing, youll lose out. If you roll the closing costs into your mortgage instead of paying them up front, youre paying interest on them, so youll need to factor this expense into your break-even calculation.
Increase Your Down Payment To The Next 5 Percent
For buyers with conventional mortgage financing, increasing the down payment size to its next five percent increment can result in lower mortgage rates.
For buyers with excellent credit scores, every additional 5 percent down payment may lower your rate by 0.125 percentage points. For buyers with below-average credit, though, savings begin after the down payment crosses twenty percent.
Note: this interest rate strategy applies to conventional loans only. FHA, VA, USDA, and most jumbo loans use a different pricing model.
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Choose A Longer Mortgage Tenure
Most lenders will allow you to negotiate the length of your loan. Depending on how much youre comfortable paying every month, you can either opt for a shorter or longer mortgage tenure. A 30-year mortgage tenure will spread out the cost of the mortgage over a longer period of time compared to a 10-year loan, resulting in a smaller mortgage payment.
However, do keep in mind that this means you will also have to pay more in interest in the long run. Finding the right balance between the loan tenure and EMI will be key.
Put Your Windfall On The Mortgage
If you receive a work bonus, an inheritance or other lump sum, you could consider putting some of this into your home loan. It might be tempting to book a holiday. But in the long run, reducing your loan period will probably be more relaxing.
As with any large sum, you may wish to consult your financial adviser or accountant before you decide where to put the money.
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Can I Negotiate My Mortgage Rate With The Bank Or Lender
By Brandon Cornett | © 2021, all rights reserved | Copyright policy
Reader question: We are about to start the process of applying for a mortgage loan, so weve been reviewing the interest rates posted on various bank websites. How can we negotiate the mortgage rate offered by the bank or lender, after we apply for the loan?
Yes, you can try to negotiate the interest rates presented by the lender. Whether or not youll be successful is a different story. Much will depend on your qualifications as a borrower. Generally speaking, well-qualified borrowers have more negotiating power than those who are marginally or poorly qualified for a home loan.
You can also use prepaid interest points to negotiate a lower mortgage rate from the bank. But were getting ahead of ourselves. Lets start by talking about those all-important qualifications I mentioned above.
Getting Rid Of The Fha Mortgage Insurance Premium
If you got your FHA loan after June 1, 2013, you likely pay a monthly mortgage insurance premium . If you put more than 10% down, youll have to pay MIP for the first 11 years, but if you put less than 10% down, MIP is required for the life of your loan.
If youre stuck with MIP, refinancing into a conventional loan may be your best bet but it all comes down to how much equity you have. If you have less than 20% equity in your home, taking on a conventional loan may just mean swapping MIP for private mortgage insurance . But if you have 20% equity, you wont be required to pay PMI on a conventional loan.
To determine how much equity you have, youll need to know how much your home is worth. When you refinance, your mortgage lender will require an appraisal of the home to determine the value. Your equity will be based on what your home is worth when you refinance not what it was worth when you bought it. To find out how much equity you have, simply subtract your current loan balance from your current home value.
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Ways To Lower Your Mortgage Payment
Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It may not have been reviewed, commissioned or otherwise endorsed by any of our network partners.
The most common way to lower your mortgage payment is to refinance your current home loan or make a bigger down payment if youre buying a home. However, there are other ways to reduce what is usually your largest monthly expense.
Well explain those options below to help you find a good fit to shrink your monthly housing expense.
Refinance Your Mortgage To A Lower Rate
One of the best ways to lower your mortgage payment is by refinancing your home loan. As a rule of thumb, a mortgage refinance is probably worth it if you can shave at least 0.75% off your current mortgage rate. This will ensure youre saving money on interest even after you factor in closing costs, as long as youre planning on having the house for a bit.
Example:
Here are some of the major refinance options, by loan type:
If youre ready to lower your mortgage payment, refinancing can be a great option. Just be sure to shop around and consider as many lenders as possible. With Credible you can compare prequalified rates from our partner lenders in the table below in just three minutes.
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Reap Rental Income At Home
There are at least two options here: House hacking and adding an accessory dwelling unit .
House hacking can mean buying a two- to four-unit multifamily building for little down and living in one of the units. Multifamily homes with up to four units are considered residential when it comes to financing. Owner-occupants can choose Federal Housing Administration loans, Veterans Affairs loans, or conventional financing.
Some people house-hack a single-family home, which just translates to having housemates or short-term rental guests.
An ADU, aka an in-law suite, granny flat, or carriage house, is a secondary dwelling unit on the same lot as a primary single-family home. It can be a detached cottage, a garage or basement conversion, or an attached unit.
With any addition or renovation, you might want to estimate return on investment how much youd charge and how long it would take to recoup the cash you put in before turning a profit.
How To Avoid Risk When Making Extra Principal Payments On Your Mortgage
If you are making extra principal payments on your mortgage, heres a simple way to avoid the risk of your bank not applying your payments properly: check your remaining loan balance before you make an extra principal payment. If you dont know how to get this information, we have a short video on where to find it. Then, on your next statement, make sure that your remaining loan balance has decreased by the same amount as your extra payment plus the principal you paid in your monthly mortgage payment. For example, if your remaining loan balance is $100,000, and you pay $2,000 as an extra principal payment, make sure your loan balance decreases by $2,000 plus the principal you paid in your monthly mortgage payment. For example, if you current monthly mortgage payment is $2,400, and $1,800 of it is your interest payment and $600 is your principal payment, make sure that your remaining loan balance at your very next statement is $97,400.
Dont delay! Errors in the way that payments are applied are then amortized and can cost you even more money over time as you may end of paying interest on the amount that you intended to go to paying down your loan balance. Its essential that you pay attention to your remaining loan balance to avoid this risk.
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Getting Rid Of Private Mortgage Insurance
If you didnt put 20% down on your home when you bought it, youre probably paying for private mortgage insurance as part of your monthly payment. PMI protects your lender in case you default on your loan.
Getting rid of PMI doesnt necessarily require a refinance. Once you hit 20% equity in your home, you can ask your lender to remove PMI. There are a few things to keep in mind about this:
- If youve hit 20% equity as a result of your homes value increasing or making extra payments, your lender will probably require an appraisal.
- If youve hit 20% equity on your regular payment schedule , your lender wont require any appraisal.
- Once you hit 22% equity according to your regular payment schedule, your lender must automatically cancel PMI from your loan.
If 20% equity is still out of reach, a refinance with lender-paid mortgage insurance might be a way to get rid of monthly PMI payments. With LPMI, you can either pay for PMI upfront in a lump sum or opt for a slightly higher interest rate. This allows you to save money since mortgage interest is tax-deductible, but PMI isnt.
Build Up A Rainy Day Fund
Save for an emergency. We recommend setting aside three to six months’ worth of living expenses in savings in case you lose your job or incur unexpected costs. Without those financial reserves in place, you could put your mortgage in jeopardy, which includes the extra money you worked so hard to put toward it if youre making extra mortgage payments
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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.
