How Your Mortgage Rate Is Determined
Several factors help determine the mortgage rate youre offered, including:
- Your credit score. The higher your score, the lower your rate will be.
- Your down payment amount. The larger your down payment, the lower your rate tends to be.
- Your mortgage amount. Larger loans often qualify for lower interest rates than smaller loans.
- Your repayment term. Shorter-term loans, like a 15-year mortgage, tend to have lower rates.
- Your mortgage program. Conventional loans will have varying rates compared with FHA or VA loans, for example.
- Your interest rate type. Fixed-rate loans tend to have higher rates than variable rate loans but you get the security of a rate that never changes.
- Your homes location. The mortgage market can be highly localized, and rates in one town may be different from those in another.
- Your mortgage points. Mortgage points are essentially an optional, upfront fee you pay to get a mortgage rate reduction.
Extend Your Mortgage Loan Term
Extending your loan term will lower payments. Say youve been paying down a 30-year mortgage for 10 years or more. Refinancing the existing balance into a fresh 30-year term would slash your payments, even if your interest rate didnt budge. If rates have dropped, your payments would contract even more.
The downside, of course, is youll add a decade or more to your repayment period.
At the risk of stating the obvious, if youre struggling with the payments on a 15- or 20-year mortgage, refinancing to a 30-year term will save you hundreds every month, even as your interest rate bumps up.
Dont Stay On A Standard Variable Rate Mortgage
The most expensive mistake that most mortgage borrowers make is staying on the standard variable rate mortgage after their introductory rate has expired. With SVR mortgages, the provider effectively decides its own interest rates, and they are invariably high: it is both how mortgage lenders make their profits, and how they pay for the cheap introductory deals which lure customers in the first place. See our guide remortgaging made simple.
In effect, the homeowners who have SVR mortgages are paying more than they need to each month and subsidise those who shop around every few years to get the best deal. The only way to stop subsidising other homeowners is either to get one of those rare life-long deals, or to shop around regularly for mortgage best buys. Its tedious, but is probably the biggest saving you can make.
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Sell Your Home And Buy A More Affordable One
Understanding what goes into your monthly mortgage payment is the first step toward reducing it and making your monthly budget work as planned. If your mortgage is through Rocket Mortgage®, we encourage you to speak to one of our Home Loan Experts to explore ways to reduce your payments.
Ready to refinance your mortgage? Get started today, from the comfort of your home.
See What You Qualify For
What Is Loan Amortization
Loan amortization is the reduction of debt by regular payments of principal and interest over a period of time. For example, if you make a monthly mortgage payment, a portion of that payment covers interest and a portion pays down your principal.
Typically, the majority of each payment at the beginning of the loan term pays for interest and a smaller amount pays down the principal balance. Assuming regular payments, more of each following payment pays down your principal. This reduction of debt over time is amortization.
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Pay Extra On Your Mortgage
Unlike a credit card, your mortgage probably has a set monthly payment of principal and interest. Paying more than the required amount one month does not mean you will have a lower payment amount the next. However, paying extra on your mortgage each month could help you pay off your mortgage faster and eliminate monthly mortgage payments sooner. For example, paying extra principal each month could help you pay off a 30-year mortgage in 27 years and save you from needing to make 36 monthly payments.
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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Ways To Lower Your Mortgage Rate
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Buying a home is the largest purchase most people will make. And if you aren’t aware of the financing options available, it could wind up costing you far more than you’d expect.
Controlling your homeownership costs begins with your mortgage loan and the interest rate attached to that mortgage. The lower you can push your mortgage rate, the less money you’ll pay over the life of the loan.
Here are 10 ways to lower your mortgage rate.
Choose An Accelerated Option For Your Mortgage Payments
An accelerated payment option lets you make weekly or biweekly payments. With this option, youre putting more money toward your mortgage than with a monthly payment.
Accelerated payments can save you money on interest charges. By accelerating your payments, you make the equivalent of one extra monthly payment per year.
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Are There Closing Costs For An Fha Streamline Refinance
Yes. For a standard FHA streamline, homeowners are expected to pay closing costs when they refinance. The bulk of the closing costs typically arent allowed to be rolled into the new loan and usually amount to 2-5% of the loan amount. That said, talk with your lender about options to reduce your closing costs or negotiate fees, which we blogged about here.
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.
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Changing Payments On Your Endowment Policy
If you have an endowment mortgage, you could think about either:
- reducing the payments on your endowment policy
- stopping payments into your endowment policy altogether. You will have to make up these payments at a later date.
Making any changes to an endowment policy can be complicated and financially risky. If youre thinking about doing this, you should get advice from an independent financial adviser first.
For more information about endowment policies, see Mortgages in Buying a home.
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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Get Started On The Right Foot
It can be hard to wait when youre ready to buy a home. If youre just beginning the process and looking for ways to keep your mortgage payment low, having the 20% down payment is a great first step. Setting a larger amount of money aside also gives you options when it comes time to decide how much you want to pay for your mortgage each month.
Even if youve been approved and can afford a specific mortgage payment, a larger down payment lowers the amount of principal you owe and removes PMI costs that can add a large amount to your overall payment.
No matter what stage of the home buying process youre in now, it helps to have a trusted advisor to answer your questions and create a plan thats best for you and your financial situation. At FirstBank Mortgage, our goal is to help our customers get to a better place whether thats in new home or a new financial position. For more information, questions or concerns, please email and well connect you with a loan officer in your area.
Refinancing To Secure A Lower Interest Rate
One of the best reasons to refinance is to lower the interest rate on your existing loan. Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance.
Reducing your interest rate not only helps you save money, but it also increases the rate at which you build equity in your home, and it can decrease the size of your monthly payment. For example, a 30-year fixed-rate mortgage with an interest rate of 5.5% on a $100,000 home has a principal and interest payment of $568. That same loan at 4.1% reduces your payment to $477.
Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development .
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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.
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.
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Keep Your Payments The Same When Changing Your Mortgage
When you renew your mortgage, you may be able to get a lower interest rate.
Some mortgage lenders may allow you to extend the length of your mortgage before the end of your term. Lenders call this early renewal option the blend-and-extend option. They do so because your old interest rate and the new terms interest rate are blended.
When your interest rate is lower, you have the option to reduce the amount of your regular payments. If you decide to keep your regular payments the same, you can pay off your mortgage faster.
How To Lower Monthly Payments On Mortgage
You could be seeking to reduce your monthly payments on mortgage because of several reasons you were over ambitious when buying your house, your financial situation has unfortunately worsened since you took your mortgage, or you are simply looking to lower your recurring household cost. There is no need to worry, as there are several options that you can explore to bring down your monthly mortgage expenditure.
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Va And Usda Streamline Refinance
VA and USDA mortgages are Government-backed home loans that qualify for the streamline refinance program.
If you currently have one of these loans, you may qualify for a streamline refi to reduce your monthly mortgage payments by getting a lower rate.
HARP, home equity loans, and a cash-out refinance are all options to reduce your mortgage rate. It would be best to speak with a loan officer to evaluate your options to refinance your mortgage.
Have A Long And Consistent Work History
On top of a good credit score, mortgage lenders also want to see a consistent and long-tenured work history. If you’ve been working at the same place for many years and have consistent or growing annual income, lenders will be more likely to give you a home loan with an attractive rate.
Conversely, if you’ve changed jobs multiple times recently, lenders may be more leery of giving you a big loan because your income isn’t as reliable. A loan officer will verify your employment status before you make an offer on a home and before the closing date of a home purchase. If you’ve changed jobs or quit during the closing process, it could jeopardize your ability to get a home loan.
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Comparison Shop For New Homeowners Insurance
Like we mentioned before, lenders will likely require a homeowners policy to be active and up to their coverage requirements for the life of the loan. Homeowners insurance premium costs vary state to state. The home type and its location play a big part in the monthly premium costs as well.
You can shop around for a better deal on your homeowners insurance policy premiums. When youre getting a quote, be sure to let the agent know if youve upgraded your security system or made significant renovations that may have reduced your exposure to risk. The safer your home is from the elements, natural disasters and intruders, the more affordable your insurance premiums could be.
Its always a good idea to call your lender prior to starting your search for new homeowners insurance. Lenders have minimum requirements that your new policy will need to meet. Youll also want to ask how to change your homeowners policy because they may require certain forms or additional coverage. Be thorough in your planning and you can save money and time.
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
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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 might be a way to get rid of monthly PMI payments. Many lenders offer lender-paid mortgage insurance . 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.
Overpay On Your Mortgage Repayments Whenever You Can
Interest rates are at an historic low, which means there will never be a better time to get your mortgage down by paying more than your scheduled monthly payments by as much as you can afford to. By paying off more of your mortgage now, you will be in a better position when interest rates do start to rise, and the monthly payments start to hurt.
Low interest rates mean both that your monthly mortgage interest payments are less, leaving you with more flexibility to pay off the capital, and that interest rates on savings accounts are pathetically low. Also, you pay tax on interest earned on your savings, while your mortgage payments must be paid out of post-tax income, making it an even better deal to pay off the mortgage rather than save.
Check with your lender first that there arent any penalties to overpaying. Make sure there arent any other expensive loans or credit cards that need dealing with first, and once you have a rainy day fund for any problems, you can start using spare income to pay off your mortgage.
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