Housing costs take the biggest bite out of most families’ budgets. And if that housing payment comes in the form of a mortgage, it may seem like an expense fixed in concrete. It’s not easy to lower your mortgage payment, but it’s not impossible either. If you’re regularly running out of money before the end of the month, we have some advice on how you can cut down what you are paying for your home right now. If your mortgage payment is making you feel house poor, try lowering it with one or more of these approaches:
- Cancel Your Private Mortgage Insurance
- Recast Your Mortgage
- Refinance Your Mortgage
- Reduce Your Assessment
- Move to a Cheaper Home
Home buyers who put down less than 20% of the purchase price are generally required to have private mortgage insurance, which protects the lender (not you) against the possibility that you’ll default. The cost of PMI is typically between 0.5% and 1% of the original loan amount annually. For most loans, you can request cancellation of PMI once the loan-to-value ratio falls below 80%. Most lenders are required to cancel it once the ratio reaches 78%.
Read the terms of your mortgage carefully, or question your lender on how your PMI is structured. Some loans require you to pay it for a minimum number of years, even if you pay down the principal faster than scheduled. And for recent FHA loans, PMI lasts for the life of the loan, so you must refinance to get rid of it.
Here’s how you might save money on your mortgage payment if you buy the current median-priced existing home for $234,000 at today’s typical rates, with 10% down, and you remove the PMI once your loan-to-value ratio hits 80%. The payment below includes principal, interest, taxes, homeowners insurance and PMI.
|With PMI||After Removal of PMI|
|Monthly Mortgage Payment||$1,410||$1,306|
According to the original mortgage schedule, it would take about six years to reach that point, but there are a few ways you can get there sooner. You could pay extra principal toward the mortgage, either a small amount each month, or a lump sum. Before you do this, look into the terms of your mortgage to see if you would get hit with any prepayment penalties. If you found $4,000 to put towards your mortgage, for example, you could reach the 80% LTV ratio about 10 months earlier.
Another way to get there faster is to ride a rising housing market. While you would need to pay out-of-pocket for a new appraisal, if your home has appreciated significantly, you may have already reached the loan-to-value ratio beyond which PMI is not needed. In a rising market, the value of your house will be higher, but since the value of your loan is constant, your loan-to-value will fall, which just might improve your LTV ratio.
Significant work you’ve put into the house could also raise its value. However, a higher appraisal could also lead to higher property taxes and homeowners insurance premiums, which could counteract your savings from the elimination of PMI.
If you’ve been able to get ahead on your mortgage principal, maybe by making some extra principal payments along the way, or if you currently have a chunk of money, like a work bonus, an inheritance, or lottery winnings, that you’re willing to put into your home, you may be able to recast your loan to get a lower monthly payment.
In recasting the loan, the lender typically keeps your original interest rate and the original length of the loan (for example, if you have 20 years of payments left, you’ll still have 20 years of payments left after the recasting). What changes is your monthly bill, to account for the additional principal you’ve already paid off, and thus the lower amount of interest you’ll ultimately pay.
Some lenders will recast your mortgage for a relatively low fee—usually under $500. They may have other requirements for recasting, such as a specific amount you need to pay towards your principal when the changes are made.
Here’s how it would look for the median-priced home we considered above if you had about $5,000 to put towards the principal two years into your mortgage. This also assumes a recasting fee of $250.
|Before Recasting||After Recasting|
|Monthly Mortgage Payment||$1,410||$1,385|
If PMI removal or the extra money you’d need to have your mortgage recast are out of reach, you still have a few arrows in your quiver in your quest to lower your monthly mortgage payment.
If your mortgage interest rate is higher than what’s currently on offer, or if you’re willing to extend the payment period further into the future, you can get a lower monthly mortgage payment by refinancing. This process involves significant closing costs, usually between 3 and 6% of the new loan principal, which you also need to consider. Sometimes these can be rolled into the new loan, but you’ll still end up paying them eventually. Online mortgage refinance calculators can show you the specifics for your circumstances.
Two ways to make sure your monthly payment is lower after refinancing:
Lock in a lower interest rate
This tactic may also lower the amount you pay in the long run, as long as you stay in the house enough years to recoup the closing costs. We’ll take the example above and assume that, with 25 years left on your current mortgage, you decide to refinance into a new 25-year loan at an interest rate 1% lower than your current one. With relatively low closing costs just above 3%, it would take you about a year to break even.
|Before Refinancing||After Refinancing|
|Monthly Mortgage Payment||$1,410||$1,305|
Extend the length of the loan
You can also refinance into a longer loan, for example a 30-year mortgage for the example above, and your monthly cost would go down even more. You'd need to run the numbers to make sure you come out ahead over the long term.
|Before Refinancing||After Refinancing|
|Monthly Mortgage Payment||$1,410||$1,214|
This tactic will only help you if you have good reason to believe that your home’s current assessment is higher than it should be, and as a result, you’re wrongly paying too much in property taxes. That could be the case if the assessor made a major mistake, such as counting a nonexistent bedroom or bathroom or misrecording square footage. Or it might be due to insider information you have about the house, like the roof is leaky or the backyard floods during heavy rains.
If you believe your house is overassessed by a few thousand dollars or more, it’s probably worth filing an appeal, and appearing before local authorities to plead your case. They’ll want to see recent sales of comparable homes, and proof for any argument you make. Property tax rates vary across the country, but at a typical rate of 1.5% of assessed value, you could save about $150 per year for every $10,000 you can knock off the assessment.
Just don’t try this approach if you’ve recently renovated your kitchen or added a swimming pool. These are updates that generally improve the value of your house, and might result in a decision against you, too.
Obvious. And perhaps extreme (although not as drastic as reverting back to renting). But if your current home is really unaffordable, and none of the tactics above can help you lower the expense, it might be worth shopping around. You may be able to see what you can get for a lower price, or even a new house on the market that you can afford. Don’t forget to factor in all of the transaction costs like realtor fees, closing costs, and moving expenses.
The table below shows the difference in monthly mortgage payment if you can find a home that’s 10% below the median priced home we’ve used throughout this guide.
|Monthly Mortgage Payment||$1,410||$1,275|
To get a lower mortgage payment, you might have to move farther from your job or to a less desirable neighborhood, but lessening your financial stress over your mortgage payment might be well worth these sacrifices.