How To Lower Your Mortgage Payment

Looking for extra breathing room in your budget? Lowering your mortgage payment can be a great way to free up funds for other financial commitments.

Let’s look at all the ways you can save money on your monthly mortgage payment.

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 from 5% to 4% can mean a monthly savings of almost $120.

If you’re looking to lower your mortgage payment, keep an eye on the market. Look for rates that are lower than your current interest rate. When rates drop, contact your lender to lock your rate so it doesn’t go up before your loan closes. 

Another way to get a lower rate is to buy down your rate with points. Mortgage discount points are an upfront fee, paid to your lender at closing, 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 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, it’s 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.

Get Rid Of Mortgage Insurance

Mortgage insurance can add quite a bit of money to your monthly payment. How you get rid of mortgage insurance depends on what type of loan you have.

Getting Rid Of The FHA Mortgage Insurance Premium (MIP)

If you got your FHA loan after June 1, 2013, you likely pay a monthly mortgage insurance premium (MIP). If you put more than 10% down, you’ll 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 you’re 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 (PMI). But if you have 20% equity, you won’t be required to pay PMI on a conventional loan.

To determine how much equity you have, you’ll need to know how much your home is worth. When you refinance, your 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 divide your current loan balance (how much you owe) by your current home value.

Getting Rid Of Private Mortgage Insurance (PMI)

If you didn’t put 20% down on your home when you bought it, you’re probably paying for private mortgage insurance (PMI) as part of your monthly payment. PMI protects your lender in case you default on your loan.

Getting rid of PMI doesn’t 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 you’ve hit 20% equity as a result of your home’s value increasing or making extra payments, your lender will probably require an appraisal.

• If you’ve hit 20% equity on your regular payment schedule (i.e., you haven’t made any extra payments), your lender won’t 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 (LPMI). 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 isn’t.

Extend The Term Of Your Mortgage

If a lower payment is your goal, extending the term of your loan can help you get there. A longer mortgage term spreads out the loan balance over more payments.

Here’s an example: Let’s say you bought your home 10 years ago with a $200,000 30-year-fixed loan. Without accounting for taxes and insurance, your payment, at 4.5% interest, is $1,013.

Now let’s say you want to lower your mortgage payment. Since you’ve been paying on your loan for 10 years, you’ve reduced the balance to about $160,000. By getting a new 30-year fixed loan, you’d spread the smaller balance over 30 years. Your new payment, at the same interest rate, would be just $811. That’s a savings of over $300 a month.

Shop Around For Lower Homeowners Insurance Rates

If you’re 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.

Call around to insurance companies to get quotes, and don’t be shy about asking for discounts. You could save money based on certain features of your home, like security systems and fire alarms. You could be eligible for a discount based on your employer or job status. And bundling your homeowners insurance with your auto insurance and other policies could save you money too.

You can also review your coverages to make sure you’re not overpaying for something you don’t 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 you’re 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.

Appeal Your Property Taxes

If you have an escrow account on your mortgage, then you’re probably paying for your property taxes as part of your monthly mortgage payment.

Your property taxes are based on the tax assessment conducted by your county. The assessor determines the value of your home and land after putting it through a deep analysis. If the assessor values your home too highly, you’ll end up paying more taxes than you really have to.

You can usually find out the assessed value of your property by looking at your tax bill or visiting your local county recording office’s website. If you think your home is overvalued, you can protest the assessment. Come prepared with a list of recently sold comparable homes or an appraisal, if you have one. A reduced assessment could mean lower property taxes and a lower monthly mortgage payment.

Summary

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 Iris Mortgage can help. With Iris Mortgage, you’ll be able to see your options and understand just how much money you could save every month. Start your mortgage refinance application online now!