If your monthly budget is already tight, a high mortgage payment may seem like an additional hardship. Fortunately, there are many strategies to lower your mortgage payment each month.
A refinance is the most straightforward approach to reducing your home payment. But there are other options. You can try various methods to reduce your payment and save money even if rates are high and a refi isn’t a good idea. Here is what to do.
Lowering Your Monthly Mortgage Payment Methods
Understanding how to reduce your mortgage payment may give you more money for other financial demands if you’re seeking more wriggle space in your budget.
Although a mortgage refinances is frequently the simplest way to do so, it is not your only one. Here are nine methods to reduce your monthly mortgage payment, both with and without refinancing:
- Ask about a forbearance plan
- Ask for a loan modification
- Extend your loan term
- Lower your homeowner’s insurance rate
- Lower your interest rate with a refi
- Recast your mortgage
- Remove mortgage insurance
- Switch from an ARM to an FRM
- Use a Streamline Refinance
Let’s look at each choice more closely.
1. Eliminate mortgage insurance costs
Your monthly payment may increase significantly if you have private mortgage insurance (PMI) or FHA mortgage insurance premium (MIP). Many households could save over $100 monthly if this extra fee were dropped. And given the significant equities gains of recent years, removing PMI might be more straightforward now.
“Canceling mortgage insurance premiums is perhaps the most likely way to lower your total monthly payment in the current market.”
-Jon Meyer, a licensed MLO and a loan expert for The Mortgage Reports
“If you are paying private mortgage insurance (PMI), probably because you contributed less than 20% to your down payment, you may be able to do away with PMI by having your home appraised,” advises Andrea Woroch, a financial consultant located in California. The author continues if your home’s value has increased significantly since you first bought it, which may be enough to qualify for PMI removal.
Additionally, mortgage insurance premiums (MIP) must be paid by FHA homebuyers for the duration of their loans. Refinancing from an FHA loan into another mortgage product, such as a conventional loan, is the only method to eliminate MIP.
According to Jon Meyer, a registered MLO and The Mortgage Reports lending specialist, eliminating mortgage insurance payments may be the most effective approach to reducing your total monthly payment in the present market. Despite rising rates, he continues, values have increased.
2. Change your loan to a lower interest rate.
Homeowners most commonly do refinancing to lessen their mortgage interest rate. Your monthly mortgage payments will consequently be reduced, but that’s not all. Throughout the loan, it can also result in savings of tens of thousands of dollars. To save money on interest, you must be eligible for a new rate lower than your present rate.
Many homeowners won’t have the option of refinancing to a cheaper rate in a market with rising interest rates. But not everyone can say that. You can be eligible for a reduced interest rate today if, for example, your credit score was low when you purchased your property but has increased since then.
Anyone paying an interest rate above the current market rate ought to find out if they qualify for a refinance of their mortgage.
3. Refinance to lengthen the term of your loan
Refinancing your present mortgage into a new loan with a longer term is an additional choice. The period you have to repay your loan is known as the loan term. Extending the repayment time for the remaining loan balance can lower your monthly mortgage payment. Even if your new rate is a little higher than your old rate, it is still effective.
For instance, if you have 20 years left on a $300,000, 30-year mortgage with 6% interest, your monthly payments will be close to $1,800.
The mortgage balance is approximately $250,000 because you have been paying it off for ten years. After refinancing into a new 30-year loan with roughly the same interest rate, your new monthly payment would be $1,500. This transaction would result in monthly savings of around $300.
Keep in mind that you can pay more in interest overall. However, your main objective is not to have a reduced monthly mortgage payment.
4. Convert to a fixed-rate loan.
You may have an adjustable-rate mortgage (ARM) that has a fixed rate for the first few years and then switches to a variable rate. Your rate may decrease, but it could also increase suddenly, forcing you to make larger monthly payments than you can bear.
However, suppose you refinance to a new fixed-rate mortgage loan. In that case, you may do away with the risk associated with variable rates and benefit from the security of consistent monthly mortgage payments. Depending on the new rate you are eligible for, you can save more money throughout your loan.
The monthly savings from switching from an ARM to a fixed-rate loan might be insignificant. However, since you won’t have to worry about your rate or payment rising in the future, it does give you more financial security.
5. Make use of an accelerated refinance
A Streamline Refinance, available on many FHA, VA, and USDA home loans, is a fourth option. The lender must refrain from reevaluating your income, credit, or employment when you refinance using a streamlined process. Because of this, the loan can close more rapidly and with less paperwork.
Additionally, a Streamline Refi allows you to forego the home appraisal. As a result, you can refinance with little to no home equity built up and possibly lock in a lower rate than you would with other low refinancing options.
According to Eileen Derks, head of mortgages at Laurel Road, “With a Streamline Refinance, the lender is typically not allowed to add closing fees to the loan total, and the interest rate and monthly payment must be sufficiently cut to make it advantageous for the borrower.”
In essence, she says, a Streamline refi enables the borrower to get a lower rate and payment for relatively little money and work.
6. Refinance your loan
A mortgage recast entails preserving the same maturity (payoff) date but making a sizable lump sum payment to the loan principle. You can cut your mortgage payment with a recast rather than refinancing, which would allow you to preserve your current low-interest rate.
This modifies your loan’s re-amortization schedule and, as a result, lowers the amount of principal and interest owed each month without requiring a refinance, says Derks, making it a highly affordable and practical choice.
A mortgage recast may be an option if you just received a significant financial windfall, such as through an inheritance or a sizable bonus at work. Speak with your servicer if you’re interested in refinancing your mortgage (the company to which you make mortgage payments). They’ll be able to explain your alternatives to you.
7. Put your debt on hold while applying for forbearance.
If you’ve suffered a temporary hardship and income loss, you could also be eligible to put your loan on hold through forbearance. Remember that forbearance won’t permanently lower your monthly mortgage payments, but it can offer temporary respite.
Cindy Laffey, branch partner and mortgage advisor with Inlanta Mortgage in Pewaukee, Wisconsin, explains that while a forbearance will let you delay mortgage payments, it won’t let you skip costs entirely.
After the forbearance period has ended, you will need to make up any missed lower payments or, depending on your financial situation, negotiate with your provider to find the best way to repay the debt. Forbearance is generally not advised because it may prohibit you from refinancing and hurt your credit scores, warns Derks.
8. Inquire for debt modification
As an alternative, consider looking into a loan modification, which, if you qualify, could lengthen the loan’s duration or reduce its interest rate.
To help borrowers avoid foreclosure and avoid losing their homes due to circumstances that may or may not have been within their control, loan servicers may provide these options, according to Laffey.
To be eligible, you’ll need to present supporting documentation, such as proof of hardship, proof of income, bank statements, and more.
9. Reduce the cost of your homeowner’s insurance
Since you originally purchased your house or if it has been a while, it is wise to examine your homeowner’s insurance coverage. If you make your mortgage payment through escrow, you might ignore one of the quickest and simplest ways to do so. That’s because insurance premiums frequently increase, according to Woroch.
Whether you discover that your coverage’s premiums have increased, get in touch with your insurance provider to see if you qualify for a lower price or start looking for a more affordable policy.
Advantages of a lower mortgage payment each month
According to Laffey, the real benefit of a lower mortgage payment is the greater household cash flow that may be used for various purposes. Saving money on your mortgage, according to her, can help you:
- Pay off other debts with higher interest rates and credit cards more quickly
- Create a nest egg of savings for unforeseen costs and home repairs
- Raise savings for education and retirement
- Manage the rising costs of property taxes and homeowners insurance better.
Refinancing your mortgage could be of great assistance if you require extra monthly cash flow for any of the reasons listed above or for any other reason.
Who can obtain a refinance?
The standards for a refinance of a mortgage are comparable to those for buying a home, according to Khari Washington, mortgage broker, and owner of 1st United Realty & Mortgage. According to Washington, mortgage lenders will consider your debt-to-income ratio (DTI), credit score, home equity, income stability, and current house worth.
To determine if a refinance is appropriate for your case, you need also be aware of the advantages and disadvantages of one. Closing expenses for refinancing run between two and five percent of your loan balance.
Use a mortgage refinance calculator to compare your projected closing costs with your monthly savings. A refinance usually pays off if the long-term savings outweigh the initial costs.
FAQ about How can I lower my mortgage payment?
Without refinancing, can I cut my mortgage payment?
Recasting your mortgage, altering your loan, seeking a forbearance plan, reducing mortgage insurance costs, and obtaining a reduced rate on homeowners insurance are a few ways to reduce your mortgage payment without refinancing. Only some homeowners are eligible for every option, but you should still go to your mortgage company to see what they can do for you.
If my mortgage payments are too high, what should I do?
Before you get too far behind on your monthly payments, talk to your loan provider. The likelihood of mortgage lenders working with borrowers still making on-time payments is higher. Your provider can sign you up for a mortgage forbearance or modification program.
Does refinancing make sense?
Generally speaking, refinancing is worthwhile when it will enable you to create equity, save you money in the long run, or accelerate your home ownership. There may be better options than refinance for people who intend to sell their houses soon because recouping the closing fees can take some time.
What are the refinancing rates currently?
Average refinance rates across the country are now higher than the low rates available in 2020 and 2021. However, some homeowners can still gain from a refinance of their mortgage. To get a mortgage plan that best suits your circumstances, Laffey advises that you speak with a skilled mortgage planner or loan officer.
Even if you’re still determining whether a refinance will benefit you, discussing your alternatives with a mortgage lender is worthwhile.