Studies show that Americans typically spend about 40% of their income on housing costs. People paying a mortgage each month aren’t surprised by this number: We all know what a bite housing costs can take out of our monthly budgets! People often think that once they sign the mountain of documents at closing, their mortgage payments are set in stone until the mortgage is paid off. But the truth is that this isn’t necessarily the case. For example, if you pay your insurance and property taxes through your mortgage company, you can expect that amount (typically called your escrow payment) to fluctuate yearly. There are also several other ways homeowners can reduce their monthly mortgage payments and free up their budgets for other priorities.
Refinance Your Mortgage for a Lower Interest Rate
If you need to lower your mortgage amount and are current on your payments, the first thing to consider is whether interest rates are lower now than when you bought your house. If so, then refinancing your home could reduce the amount of money you pay over the life of the mortgage as well as the amount you pay each month. Typically, experts say refinancing is worth considering if you can take at least 0.75% off of your current interest rate. How to go about this depends on the type of loan you have.
- FHA Loans: If your FHA loan is more than seven months old, you can streamline refinance your home. The lender verifies that the last six payments you made were on time and that your new loan will actually have better terms than the old one. However, your home doesn’t need to be appraised or your income verified.
- USDA Loans: Loans held by the USDA that have had 12 on-time payments are eligible for a streamline refinance if refinancing will save the homeowner at least $50 each month.
- VA Loans: Veterans Affairs has a program called the Interest Rate Reduction Refinance Loan (IRRRL) to help veterans reduce their monthly mortgage payments.
- Conventional Mortgages: Streamline refinancing isn’t offered for loans backed by either Freddie Mac or Fannie Mae. Instead, your lender will pull your credit report and verify your income and might require an appraisal.
Refinance to a Longer-Term Mortgage
Another way to lower your monthly mortgage is to get a rate-and-term refinance. This sort of refinancing allows homeowners to take advantage of lowering interest rates, but it also lengthens the life of the loan. For example, if you currently have 20 years left on your mortgage, you could refinance back to a 30-year term. Of course, while you will end up with lower payments, extending the length of the loan means that you’ll end up paying more in interest overall.
PMI stands for private mortgage insurance, and it’s insurance that protects your lender in case you default on your mortgage. Typically, somewhere between 0.5% and 1% of the total amount of your mortgage is charged for PMI each year and then divided out monthly. For instance, on a $200,000 mortgage, PMI could be $2,000 each year, which means an additional $166.67 added to your mortgage payment each month. The Homeowners Protection Act (HPA) states that you have the right to request that PMI be removed when your mortgage balance is down to 80% of the value of the home (the date when this should happen is listed on your mortgage papers). You can also request the removal of PMI if you’ve made additional payments that helped you get to 80% more quickly or if your home has been appraised at a high enough value to push you over the threshold. Typically, lenders also require a good payment history to remove PMI. Lenders must automatically remove PMI when your principal balance equals 78% of the value of your home at the time of purchase. Otherwise, PMI must be terminated when you hit the halfway mark of your mortgage, regardless of the balance of the loan, as long as the loan is in good standing.
These rules only apply to conventional mortgages. If you have an FHA loan that originated before 2013, you can request that PMI be removed, but the only other way to remove PMI from an FHA mortgage is by refinancing. VA and USDA loans do not require PMI.
Recast Your Mortgage
Mortgage recasting is not as well-known of an option for changing your monthly mortgage payment as refinancing your mortgage. A mortgage recasting is when the homeowner makes a large, one-time payment toward the principal of their mortgage. Lenders typically require a payment of at least $5,000 to recast the mortgage. Because it reduces the principal amount owed, recasting also reduces the amount of interest owed over the life of the loan. Because both the amount of total principal and interest owed is lowered, it also lowers the monthly mortgage payment. Recasting is a great option for people who are already locked into a low interest rate. However, if interest rates are now below what they were when you got your mortgage, you should check to make sure that refinancing wouldn’t lower your payment even more. Use a recasting calculator to see whether this option might make sense for you.
Compare Home Insurance Rates
What do home insurance rates have to do with mortgage payments? If your mortgage requires you to pay your taxes and homeowner’s insurance as part of your mortgage payment, the answer is “a lot.” For people required to have an escrow account to pay their insurance and tax obligations as part of their mortgage, fluctuating insurance and tax rates can cause their mortgage payments to rise annually. Although there’s little you can do about rising property taxes, it is possible to control rising costs by shopping around for home insurance. When you start shopping, make sure you are comparing apples to apples: The deductible and coverage should be similar from company to company. The last thing you want is to save a few dollars each month on your insurance but be left without sufficient coverage if disaster strikes. People often find that buying auto and home policies through the same insurer saves them money on both policies, so you should explore that option, too.
Apply for a Mortgage Loan Modification
A loan modification occurs when the loan holder agrees to change the current terms of a homeowner’s mortgage. The lender does this to help the homeowner prevent foreclosure and losing their home. The goal of modification is lowering the monthly payment to an amount the homeowner can handle while meeting their other obligations. Typically, modifications involve extending the original term of the mortgage or changing the interest rate. Unlike refinancing, which can involve switching mortgage companies and loan servicers, the mortgage stays with the original lender.
Under most circumstances, only homeowners who are not eligible for refinancing are eligible for a modification. For example, most lenders won’t refinance a mortgage if the homeowner is behind on their payments. Each lender will have a process for applying for their modification program. If you are in serious financial trouble with your mortgage, you could also consider a personal loan to help you get back on your feet.