How to Lower Your Mortgage Payments
If your mortgage payment takes a big bite out of your paycheck every month, you may be looking for ways to make that bite smaller so you can free up some of your income for other financial goals.
Fortunately, there are a number of smart strategies to get a lower payment. An effective strategy is to refinance your mortgage, for example, with a Discover Home Loan, to lower your rate or provide a longer term, or to avoid private mortgage insurance (PMI), if you're currently paying for it. You can also combine two or three of these options or even lower your mortgage payment without refinancing. Read on for some options that might be right for you.
Refinance with a lower rate
Here are three ways to lower mortgage payments by refinancing with a lower rate:
1. Take advantage of lower market rates. Interest rates for new mortgage loans fluctuate over time due to changes in market rates, economic trends and lenders' guidelines, among other factors. By staying on top of the ups and downs in market rates, you may be able to refinance with a lower rate.
For example, if you have $250,000 remaining on your mortgage at 6% for 30 years, your monthly payment (principal and interest) would be $1,499. If you were able to refinance to a lower 5% loan for 30 years, your monthly payment (principal and interest) would drop to $1,342, a reduction of more than $150 per month. That's significant savings.
Some of that reduction could be due to stretching out your payments rather than reducing your rate, however. Also, with certain lenders, you may have to pay upfront closing costs because you are taking out a new mortgage. Discover's mortgage payment calculator can help you figure out at what point you will recoup your upfront costs and start reducing your payment from your refinance.
You may even be able to get that lower rate with a refinance that has no closing costs. For example, Discover Home Loans, requires no application, origination, or appraisal fees and also keeps fixed rates low, starting at 3.99% APR1.
2. Improve your credit scores. Your credit scores are typically a significant factor in the rates lenders offer you when you get a new mortgage or refinance. If you've improved your credit since you obtained your current mortgage, you may be able to refinance with a lower rate even if market rates are comparable or higher than they were. To boost your credit scores, it is recommended that you check your credit report for errors, paying your bills on time, and reducing the amount of debt you have. To keep track of your credit score over time, consider signing up for Discover’s Free Credit Scorecard.
3. Switch from a fixed rate to an adjustable-rate mortgage (ARM) or interest-only (I/O) mortgage. These alternative mortgage types generally come with lower rates than a traditional fixed-rate mortgage, at least during an initial period.
One popular type of ARM is called a "hybrid" mortgage, which has a fixed rate for a set number of years and then a variable rate. For example, a 5/1 ARM has a fixed rate for five years and then a variable rate that's adjusted annually. The initial fixed rate will usually be lower than the current rate for a new 30-year fixed rate loan.
An I/O mortgage requires monthly payments of interest only instead of principal and interest. When the initial I/O period ends, you'll have to make a higher payment of principal and interest, or refinance or pay off your loan.
Refinance with a longer term
Another way to lower your monthly payments is to refinance, or recast, a mortgage you've had for a while with a new 30-year term. You'll owe more total interest over the entire term, but you might pay off your loan or refinance again before that interest accumulates. Meanwhile, you'll have a lower payment and more money every month for other expenses.
"Getting a new mortgage isn't always free, but with refinancing you may be able to get a significantly lower payment."
Refinance to remove mortgage insurance
- Refinance without PMI. If your mortgage payment includes private mortgage insurance (PMI) and you have at least 20 percent equity in your home, you can ask your lender to remove the PMI so you'll no longer have to pay for it.
- But suppose you don't have 20 percent home equity? In that case, refinancing may be a solution. You'll have to pay cash at closing to boost your equity stake, but your new loan payment may be significantly lower without the PMI, which could add hundreds or thousands to your mortgage each year.
- Refinance without MIP. If you have a recent FHA loan, you'll probably have to pay the mortgage insurance premium (MIP) for the entire term of your loan even if your equity hits the 20 percent mark. That's because MIP is non-cancelable for many FHA loans.
The only way to stop paying MIP if yours is non-cancelable is to refinance into a loan without it. If you have at least 20 percent equity, you'll be able to avoid PMI as well. Either way, you may end up with a lower payment.If you have a government-backed mortgage, you may be eligible for a streamline refinance, which involves less paperwork and lower closing costs.Three streamline refinance loan programs are:
- Federal Housing Administration: FHA Streamline Refinance
- U.S. Department of Veterans Affairs: VA Interest Rate Reduction Refinance Loan (IRRRL)
- U.S. Department of Agriculture: USDA Streamlined Assist Refinance Loan
Consider mortgage recasting
Mortgage recasting lets you pay a lump sum toward your principal without refinancing. Instead of shortening your term, your lender applies the lump sum to lower your payment.According to Svetlin Krastev of Black Sea Gold Advisors, a fee-only investment advisory firm: "Recasting usually requires a small fee to the lender, but it's much cheaper than a full refinancing. If a client is getting a one-time bonus or receiving a settlement or gift, I always suggest looking into recasting."