Mortgage payments are one of the biggest monthly expenses for most people. Lowering your mortgage payment can have a big impact on your financial comfort. What would it mean for you to save an extra $100, $200, or $300 on your mortgage payment?
For most people, these savings would go along way. Keep reading to learn more about how to lower your mortgage payment so you can save!
Start By Making A Proper Down Payment
If you have yet to purchase a home and take out a mortgage, the best thing you can do is consider increasing your down payment.
A down payment is the cash you pay upfront to buy a house. It’s also your chance to lower the amount you have to borrow from a lender. In other words, the more you borrow, the more long term mortgage debt you have.
For many mortgages, 3% is the minimum down payment required. Financial experts agree that while this may look like a tempting proposition, putting only 3% down may cause you to be upside down on your home.
20% is an ideal down payment. For one reason, you will have to pay PMI (private mortgage insurance) with anything less than 20%. PMI is an insurance premium you will be required to pay every month until you’ve paid 20% of your home’s value. PMI can cost anywhere from 0.5% to 2% of the entire loan.
Pay Your PMI Upfront
Many buyers do not realize that you can pay your PMI premium as a single lump sum upfront called single-payment mortgage insurance. For a buyer with good credit scores and a 5% down payment on a $300,000 loan, the monthly PMI payment would be an estimated $167.50. Paid upfront it would be $6,450. If this number scares you, consider the fact that after only three and a half years, you would have paid over $7,000 to the PMI company! So that’s a lower monthly mortgage payment of around $170 if you can manage it.
Another advantage is – if you are trying to get a loan – when lenders see that you will have a lower monthly mortgage payment, they will more readily qualify you for a mortgage. Lenders use a debt to income ratio to evaluate your financial situation.
Since paying PMI upfront results in lower monthly payments, this is a plus, especially if you have student loans, credit cards, or any other significant expense that may hurt your debt to income ratio.
This option may not be for everyone. Many people likely don’t have an extra $6450 to spare. However, if the seller is giving you any breathing room on the closing costs, you may use it toward the single-payment mortgage insurance.
Lower Your Mortgage Payment By Applying For Mortgage Forbearance
Mortgage forbearance is when your lender agrees to suspend or lower your monthly mortgage payments during a short-term financial hardship. At the end of the forbearance period, you may have to make up the missed amount. It’s important to contact your lender about this before you miss a payment, not after.
The CARES Act is a law passed in late March 2020 that is intended to help provide funding for economic-related to temporary shutdowns and job losses. Congress has given Americans impacted by COVID-19 the option to request up to a year of mortgage payment forbearance, renewable in 6-month increments.
Rocket Mortgage clients, for example, can request a three-month forbearance and will automatically be approved. They advise you to pay a smaller monthly payment, however, rather than nothing (if possible) because eventually, the payments will need to be re-paid.
Apply For Loan Modification
If you’ve experienced severe financial hardship, you may qualify for a loan modification. If your mortgage payment is no longer affordable because of the loss of a job or any other significant reduction in income, reach out to your lender. A loan modification could mean the restructuring of your loan to lower your monthly payments.
Choose A Mortgage Refinance Option
If you’re looking to cut expenses, in general, reducing your monthly payments by refinancing your loan makes financial sense. But don’t ignore the costs associated with refinancing. Closing costs and fees can cost up to 2-3% of your home loan.
Refinancing can be a great way to lower your monthly mortgage payments if done for the right reasons. Let’s look at some of these below.
- Your goal is to lower your mortgage payment so if you are in a situation where refinancing means you can drop PMI, that’s a great reason to do it! As we learned above, that can take hundreds of dollars off your monthly payment.
- You could also refinance to a longer-term. If you’ve made payments on a 30-year loan for a few years, for instance, you could refinance the remainder back out to 30 years. This would result in a lower monthly payment.
- Refinance to a lower interest rate. Refinancing your home to take advantage of lower interest rates is another way to lower your monthly mortgage payment.
Temporarily Leasing Out Your Home To Cover Your Mortgage
If you temporarily cannot afford your mortgage payments, you may be worried about losing your home. The good news is that you can rent out your home, and earn cash while still retaining the title to your home.
If you plan ahead and decide who you will allow living in your home, this scenario could work for you.
Another option is to rent out a part of your home. Choosing to rent a spare room in your home can provide an extra $800 – $1030 per month. According to a survey, 73% of homeowners said they rented out a room to earn extra money and 33.3% said the rental income was used to help pay monthly mortgage payments. Only 5.2% of the homeowners surveyed regretted opening their homes to renters. You can also consider becoming an Airbnb or Vrbo host to make some extra money to put towards your mortgage. Now, go get saving!