6 Ways to lower your mortgage payment

Educational content | by Advisor Voices | September 8, 2016
6 Ways to lower your mortgage payment

If you are a homeowner, it is likely that your biggest single monthly bill is your mortgage payment. In fact, your mortgage may represent the biggest loan you will ever take on with the longest repayment terms. It makes sense that most homeowners look for ways to lower their mortgage payments.

Here are 6 ways to reduce your mortgage payment:

1. Extend your repayment term.

An easy way to lower your mortgage payment is by extending your mortgage term. Most lenders will offer this service for a fee of about $250. If you extend your 15-, or 30-year mortgage to a 40-year mortgage, your monthly mortgage payment will decrease since you have more time to pay back your loan by lengthening the term.

While there are certain advantages of this way, the loan will cost you more money in the end.

2. Refinance your mortgage to get a lower interest rate.

Refinancing a mortgage means paying off an existing loan and replacing it with a new one. This is the best known of all the tactics to reduce your mortgage payment for a reason. The reason is, it really works! Reducing your interest rate not only helps you save money, but it increases the rate at which you build equity in your home, and it also decreases the size of your monthly mortgage payment.

The best time to do a mortgage refinance is when the interest rates drop lower than the rate on your current mortgage. And because refinancing can cost between 3% and 6% of the loan’s principal, it’s important to calculate your potential savings to determine whether refinance will have economic benefits for you.

3. Opt out of private mortgage insurance (PMI).

If you bought your house and put down less than 20 percent of the purchase price as a down payment, you are probably paying mortgage insurance on top of your mortgage payment.

While PMI is unavoidable for many homebuyers, it’s not something they have to keep throughout the life of their mortgage. One of the most straight forward way to get rid of PMI is to pay the original balance below 80% of the value of the loan. Once 20% of the loan is paid off, the PMI should be eliminated.

When you pay enough of the balance down, you should call your lender to verify the extra charge has been removed.

4. Ask for a recasting on your mortgage.

Recasting a loan could save you money in two ways: by reducing your monthly mortgage payment, and by allowing you to avoid the cost to refinance. A recast is when a homeowner applies an additional lump sum payment to reduce the unpaid principal balance of his or her loan. A loan recast lowers your payments, but it doesn’t shorten your loan term and it doesn’t reduce interest rate. Loan recasting isn’t for everyone, but if you have extra cash, consult your lender to see if this method of reducing your monthly payment is right for you.

5. Consider an Interest-only mortgage.

Interest-only mortgages occur in two parts: during the first phase of the term you pay just the interest on your mortgage and during the second phase of the term, you pay off both the principle balance and interest. This permits you to have more time to save up your funds towards paying off your home. If you have a 15-year mortgage and spend first 3 years paying only interest, your monthly payments are low at the begging, but you must pay off the rest of your mortgage in the remaining 12 years. Interest-only mortgages are a temporary way to lower your mortgage payments and can work only if you are able to increase your payments after the interest only phase is up.­

6. Shop around to get the best interest rate.

This cannot be emphasized enough. If you belong to any special associations or organizations, check to see if they have partnerships with lenders to give members a lower rate. If you have a membership in a credit union, you may also be able to qualify for a lower interest rate that way.