If you are a homeowner, your biggest monthly expense is most likely your mortgage. By examining the terms of your loan and by working with your lender, there is potential to save and expand your monthly budget. You can lower your monthly mortgage in a variety of ways, including restructuring your loan’s interest rate and removing your home’s monthly private mortgage insurance. To save money over a longer period of time, consider reducing the cost of interest by rescheduling your mortgage payments. Examining your loan’s principal, interest rate, and insurance, you can lower your monthly contributions.
EditReducing Your Current Payment
- Refinance your loan. The most common way to reduce monthly mortgage payments in the U.S. is to refinance your loan, or reduce your interest rate and change the length of your term payout. When you refinance, you are essentially replacing the existing loan with a new one. A new loan with a lower interest rate will help reduce your monthly payments.
- Refinancing can come with hefty processing fees and additional interest-rate costs. Be sure that you won’t end up spending more money over time.
- Remove your private mortgage insurance. If your down payment on your home in the U.S. was less than 20%, then you are paying for private mortgage insurance, or PMI. PMI protects the lender from losing money in the event of foreclosure. These yearly fees can range between 0.3% and 1.5% of the original loan. When your mortgage payment falls below 80% of your home’s appraised value, you can request that your lender remove the fee, thereby reducing your monthly payments.
- You can also pay your PMI upfront. Talk to your lender about paying this fee upon closing instead of paying it off in increments.
- Explore federal loan modification options. If you are having serious financial difficulties in the U.S., you may be eligible to receive help from the Home Affordable Modification Program (HAMP) or from other federal loan modification organizations. Your lender can help you reach out and apply to the particular programs for which you are eligible. It is best to save this option as a last resort, however, as you will have better odds receiving federal assistance if you have tried other options, such as refinancing or recasting, before submitting your application.
EditStarting Out with a Lower Payment
- Negotiate a low interest rate with several lenders. You can negotiate your mortgage interest rate with your bank, broker, or lender, and shopping around will offer you more options and leverage. Strong credit scores, assets, and a stable job also work in your favor, so be sure to cite these as you are shopping for a mortgage. If your potential lender acknowledges that you are a dependable candidate and they are aware that you are looking elsewhere for your mortgage, you can make a strong case that your interest rate should be lowered.
- If you have a strong credit score, point that out to your lender and mention that other banks or brokers have offered you a lower quote.
- Decide on the mortgage term. A 30-year mortgage can help you save more money over time, lower your monthly payments, and can provide you with tax incentives in the U.S. A 15-year payment plan can help you pay off your mortgage faster, but you will have larger monthly payments. This may hinder your cash flow and prevent you from exploring other investments. When you are applying for a mortgage, consider the lifespan of the mortgage and what is most feasible for you and your family.
- Place a large down payment on your home. Reduce the amount of money you need to borrow by paying a large down payment on your home. If you are in the position to pay more money upfront, you will have a lower mortgage principal that you will have to pay interest on. Additionally, placing a down payment that is 20% or greater will eliminate your PMI payments. This can help shorten the lifespan of your mortgage and slash your interest payments.
EditPaying Off Your Mortgage Sooner
- Opt to recast your loan. When you recast a loan in the U.S., you pay a significant chunk of your mortgage balance, also known as the principal, in one go. Your lender will change the conditions of your existing loan and calculate a new monthly payment based upon the new, reduced principal. This will lower your monthly payments, improve your cash flow, and save money in interest over the lifespan of your loan.
- Your lender may charge a modest recasting fee.
- Make an additional monthly payment every year. To reduce the lifespan of your mortgage, aim to make an extra payment every year. It may seem counterintuitive to pay more to save, but this will trim your interest payments over time. In addition, this extra payment will reduce the reminder of your principal, which will cut back on the loan’s lifespan. While you may be paying more upfront each year, you can save thousands on the interest payment.
- For example, if you have a $200,000 mortgage with a 6% interest rate that is fixed over a 30-year period, you will pay $1,199 each month for your principal and your interest. Paying one more installment of $1,199 every year can cut your mortgage span by 5 years and help you save $47,000 in interest.
- Pay your mortgage bi-weekly. Rescheduling your mortgage payments is a simple way to decrease the lifespan of your mortgage. If you pay half of your monthly payment every other week instead of once a month, you will make 26 half-payments each year. This means you will be paying 13 monthly payments instead of 12. The additional money will be applied to your remaining principal. This can help you pay off your loan more quickly and reduce your interest rate payments.
- If you set up bi-weekly payments, a 30-year fixed rate mortgage that is $270,000 with an interest rate of 3.635% can save $26,511 in interest over the lifespan of your loan.
- Talk to your lender about paying your loan biweekly instead of monthly.
- Look into the regulations and processes in your country. These U.S. options and regulations may vary from country to country.