How to Lower Your Monthly Mortgage Payment: Guide

September 23, 2020 Loans & Finance

If you currently pay a mortgage, you might be looking for ways to save on your monthly bill.

A lower mortgage payment can put some breathing room in your budget and let you focus on other financial goals. There are plenty of options, including refinancing your mortgage, removing private mortgage insurance, applying for forbearance, and more.

Here’s a rundown on how to lower your mortgage payment:

  1. Refinance your mortgage to a lower rate
  2. Refinance to a longer term mortgage
  3. Remove private mortgage insurance
  4. Apply for mortgage forbearance
  5. Request a mortgage recast
  6. Shop for homeowners insurance
  7. Apply for a mortgage loan modification

How to lower your mortgage payment

Here are some different ways you can lower your monthly mortgage payment.

1. Refinance your mortgage to a lower rate

One of the best ways to lower your mortgage payment is by refinancing your home loan. As a rule of thumb, a mortgage refinance is probably worth it if you can shave at least 0.75% off your current mortgage rate. This will ensure you’re saving money on interest even after you factor in closing costs, as long as you’re planning on having the house for a bit.

Example: Let’s say last year you took out a 30-year $200,000 home loan with a 4% interest rate and 20% down payment. Then, you qualify for a mortgage refinance rate that’s 0.75% lower at 3.25%. With this rate, your monthly payments drop from $1,064 to $997. You save $67 a month, or $24,120 over the life of the loan, minus any closing costs.

Here are some of the major refinance options, by loan type:

  • FHA loans: If you’ve had an FHA loan for at least seven months, you might be eligible for a streamline refinance, which requires less paperwork. The lender will check you’ve made your last six payments on time and will verify your assets for closing costs. But they won’t need to verify your income or appraise the home.
  • USDA loans: Home loans backed by the U.S. Department of Agriculture might be eligible for the streamlined assist program. To qualify, the lender will check you’ve made timely payments for the last 12 months and that your income falls below the limit,but you won’t need a home appraisal or credit check. You also must save at least $50 per month in the refinance to be eligible.
  • VA loans: U.S. Department of Veterans Affairs loans might be eligible for the Interest Rate Reduction Refinance Loan (IRRRL) program.You’ll pay a lender fee that’s equal to 0.5% of the loan amount.
  • Conventional refinance: There’s no streamline refi option for loans backed by Fannie Mae and Freddie Mac. When you refinance the mortgage, your lender will verify your income, review your debts, and pull your credit.

If you’re ready to lower your mortgage payment, refinancing can be a great option. Just be sure to shop around and consider as many lenders as possible. With Credible you can compare prequalified rates from our partner lenders in the table below in just three minutes.

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2. Refinance to a longer term mortgage

Getting a shorter loan term can help you pay off your debt faster, but they come with higher monthly payments.

For example, if you took out a 15-year mortgage a few years ago and realized the monthly payments are too high. Refinancing into a longer loan term can significantly lower your monthly payments.

Keep in mind: Refinancing into a longer loan term means you’ll pay more interest than you would have on the original loan. You should also consider the cost to refinance, which might reach $5,000 or more. But depending on your financial situation, the extra costs might be worth it if a refinance makes your monthly payment more affordable.

3. Remove private mortgage insurance

You might also be able to lower your mortgage payment without refinancing. Eliminating private mortgage insurance (PMI), which protects the lender, can help lower your monthly payments.

You might be paying PMI if your down payment was less than 20% on a conventional loan, or have an FHA loan or USDA backed loan which both require PMI throughout the life of the loan. Either way, you might be able to ditch that PMI.

Here’s how to get rid of PMI:

  • Conventional loan: Contact your lender. PMI should automatically fall off once you have 22% equity in your home. But you might be able to ask your lender to remove PMI when you’re scheduled to hit 80% LTV. This could happen earlier than anticipated if your home value has increased substantially.
  • FHA or USDA loan: You’ll need to refinance into a conventional loan, then ask your lender to drop PMI when you have 20% equity (or 80% LTV).

4. Apply for mortgage forbearance

If you’re financially struggling and can’t afford your mortgage payments, then a forbearance program might help. Forbearance allows you to temporarily pause or lower your mortgage payments for a set time frame.

Tip: Forbearance can keep your account in good standing, which helps you keep healthy credit. But once you get your finances back in order, you’ll need to catch up on any missed or reduced payments. Contact your loan servicer for options.

5. Request a mortgage recast

Another option is a mortgage recast. This involves paying off a large chunk of your mortgage, then your lender recalculates your mortgage payments based on a lower loan balance — which results in a lower payment.

Tip: A mortgage recast can be a good strategy if you have a lump sum of money. Ask your lender how to make additional payments on your mortgage to lower your monthly payments.

6. Shop for homeowners insurance

Homeowners insurance premiums can increase over time and push up your mortgage payment. But this part of your mortgage payment is negotiable, and you don’t have to stick with the same insurer.

Tip: Getting rate quotes from multiple insurers might help you find a better deal and save money. When you’re comparing offers, make sure the policies offer the same coverage.

7. Apply for a mortgage loan modification

If you’re 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: Before going this route, ask the lender how it will change your monthly payments and what you owe in the long term so you can see if it’s right for you.

How to lower your payment while closing on a loan

If you’re still in the process of getting a mortgage, there are plenty of ways to lower your payment while closing on the loan, too.

1. Make a larger down payment

Borrowing less money from the outset will automatically shrink your mortgage payments and help you pay less interest, all else being equal. That’s because the loan is based on a smaller balance. And if you put down at least 20% on a conventional mortgage, then you also avoid PMI payments.

Example: Let’s say you took out a 30-year $200,000 home loan with a 3% interest rate. With a 10% down payment, your mortgage payments would amount to $1,059 a month. But that payment falls to $975 if you put down 20% instead. Your monthly payments drop by $84, and you end up paying about $10,000 less in interest over the life of the loan.

2. Improve your credit score

Lenders base your mortgage rate on several factors, including your credit score. Getting a lower interest rate can also help lower your mortgage payment.

Borrowers with credit scores in the mid-700s and above typically get the best interest rates. But even a small boost can help.

Pro tip: Let’s say your credit score is 685. Increasing your score to 700, for example, could drop your APR from 2.911% to 2.734% on a 30-year fixed-rate mortgage. That lowers your monthly payment by $28.1

3. Choose an Adjustable Rate Mortgage (ARM)

When mortgage rates are super low, you might consider refinancing to an adjustable-rate mortgage to get a low initial rate and lower your mortgage payment. But before getting an ARM, consider if you can afford higher payments in the future. If mortgage rates rise before your rate resets, then the rate on your mortgage will increase, along with your mortgage payment.

Remember: An ARM has a low rate that stays the same during the initial period. After a set time frame, the rate resets periodically. For example, the interest rate on a 5/1 ARM is set for five years and then resets once a year for the rest of the loan term.

 

Find out if refinancing is right for you

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  • End-to-end experience – Complete the entire origination process from rate comparison up to closing, all on Credible.

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1https://www.myfico.com/loan-center/home-mortgage-rate-comparison/default.aspx (as of August 2020)

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