Having a smaller monthly mortgage is beneficial in all ways. Not only does a smaller installment mean you have to spend less money each month on your home, but a large mortgage payment can make it more difficult to cover daily expenses or save money for retirement, family vacations, or a rainy day.
Many lenders also want borrowers to have a debt-to-income ratio of less than 43%. This means that, in general, all monthly debt payments must make up no more than 43% of your gross monthly income. A smaller mortgage payment makes it easier to reach this benchmark.
So, if you want to guarantee a lower mortgage payment on a home you are looking to buy, or if you want a lower monthly payment on a home you already own, how can you do it? Fortunately, there are several ways to achieve this. Here are five of the easiest ways to lower your mortgage payment, some of which can lead to significant long-term savings.
If you already own a home with a monthly mortgage payment that you would like to reduce, one strategy is to extend the term of the mortgage. This is generally done by refinance your home pay off your existing mortgage with a brand new one.
When refinancing, there are two ways to extend your mortgage. One is to simply start the mortgage over from the beginning, but another option is to completely change the loan repayment terms.
Let’s say you’ve currently been in a 30-year mortgage for seven years. If you refinance the remaining principal of your current mortgage into a new 30-year mortgage, your monthly payments will decrease because you are now spreading the payments over a new 30-year period and at the same time start with less capital since you have already paid. a portion of the original mortgage.
Or, if you currently have a 15-year mortgage, you could refinance with a new 20- or 30-year home loan, thereby extending the loan term and spreading the payments over a longer timeline.
How much can you lower the installment by extending the home loan? While the specifics will vary depending on the circumstances, a borrower who just started a 15-year mortgage for $ 250,000 with a fixed APR of 4% would pay out over $ 1,849 per month in principal and interest. If that person switched to a 30-year home loan with the same APR, their payment would drop to $ 1,194 per month.
Even if you don’t want to drastically change your repayment times, you can still reduce your payment by refinancing if you can lock in an interest rate that is lower than your current mortgage. The impact of a lower interest rate can be dramatic when it comes to your monthly payment, although the specifics vary based on your situation.
Consider this example: A 30-year home loan for $ 300,000 with an APR of 4% would require a monthly principal and interest payment of $ 1,432. If you can repay the same loan amount over the same period but with a 3% APR, the monthly payment drops to $ 1,265 per month.
A lower interest rate can reduce the monthly mortgage payment when refinancing.
While interest rates are no longer at historic lows We have seen in 2020, it is still possible to get rates in the low 3% range on a 30-year mortgage. Depending on your current interest rate, this could still make a big difference in your monthly payment, although it’s important to keep refinancing costs in mind to ensure you’re actually saving money in the long run.
For people who have already paid 10 or more years on a 30-year mortgage, there is another way to lower the interest rate: switch to a shorter loan. Interest rates are typically lower on shorter home loans, so if you currently have 10 years on a 30-year mortgage, you could potentially refinance into a 20-year home loan to secure an interest rate and a lower payment and still pay off your home in a total of 30 years.
Another way to guarantee a lower mortgage payment when you buy a home for the first time is to make a higher down payment. This move means you’ll be borrowing less overall, which inevitably leads to a lower monthly payment.
How much lower? Let’s say you want to buy a new home for $ 400,000, but you’ve only saved a $ 20,000 down payment so far. The monthly principal and interest payment on a new 30-year mortgage for $ 380,000 would be $ 1,814 per month with a 4% APR. Additionally, you should also pay for private mortgage insurance, or PMI, until you have at least 20% equity in your property. Second Lending Tree, the PMI typically ranges from 0.15% to 1.95% but can reach 2.5% or more.
But, if you were able to save up to 20% of the loan amount, or $ 80,000, the monthly principal and interest payment on a new 30-year mortgage for $ 320,000 would work out to $ 1,528 per month with an APR of. 4%. And with an advance of 20%, you would also avoid the cost of the PMI.
While PMI can be automatically eliminated from your home loan once you have at least 22% equity, you may have the option to stop paying PMI upfront if you are willing to pay for an appraisal to show that you now have at least the 20% shares in your property. The benefit of going this route is that you don’t have to go through the hassle of refinancing to lower your monthly payment.
However, if you know you have 20% equity in your home, you may prefer to refinance entirely with a new lender, perhaps to stack many of the above techniques into a new mortgage. In this case, having 20% equity in your property (or more) could leave you with a new SME-free home loan. is potentially even better rates and conditions.
Finally, don’t forget that you could ask someone else to effectively subsidize part of your monthly mortgage payment if you’re willing to rent extra space. This could mean converting your home basement into a separate apartment, but it could also involve hiring a roommate or the occasional renting of a room.
Consider renting a portion of the house or ask a roommate to help you cover the monthly mortgage payment.
This option is certainly not for everyone, and we recommend that you keep in mind your current mortgage rules on renting your property, as well as any local residential rental ordinances. But it’s worth considering renting part of your home if you want to pay less for housing and other options on this list won’t work.
Lowering your mortgage payment may not be easy, but it can be worth it when you add up the years of potential savings, as well as have more discretionary cash each month. Just remember that mortgage refinancing typically requires a good or excellent credit score and that closing costs can dent how much you will save in the long run.
If you are curious about whether you can qualify for a lower mortgage payment, your best bet is to contact a lender or get a free mortgage quote in an online loan marketplace to find out the best options. A lower interest rate, a lower monthly payment, or both could be yours if you’re willing to take a few simple steps to get the process started.
Do you want to refinance but are unsure of the next step? Read the CNN Underscored guide at how to refinance your mortgage.