How To Lower Your Monthly Mortgage Payment

Whether you have a fixed-rate mortgage or an adjustable-rate mortgage, there are ways to get a lower mortgage payment each month. You can reduce your monthly mortgage payment by making a larger down payment, refinancing to a lower interest rate, or saving on homeowners insurance and property taxes.

Benefits of a Lower Mortgage Payment

The main benefit to getting a lower mortgage payment is it makes owning a home more affordable, and lets you keep more of your hard-earned money. With the savings you get from a lower mortgage payment, you can put that money toward repaying debts, building an emergency fund, making investments, or anything else you like.

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How To Lower Your Monthly Mortgage Payment When Buying a Home

A mortgage is the largest regular payment most homeowners make. At the same time, it’s important to leave room to pay other expenses. Most lenders agree that homeowners should spend no more than 28% of their gross monthly income on the mortgage, and no more than 36% of gross monthly income on all debts, including the mortgage.[1]

If you’re going to pay more than that, then you may want to think about how to lower your mortgage payment.

Make a larger down payment

Making a larger down payment on your mortgage means you can borrow less to buy the house, which will help you reduce mortgage payments. A smaller loan will have lower payments, and cost less in interest over the life of the loan.

Improve your credit score

Lenders calculate the interest rate on a mortgage using several factors, including your credit score. Improving your credit score can help you get a lower interest rate and save money on your monthly payment.

Some basic ways to improve your credit score include:

• Pay debts on time. Late payments can ding your credit score, so you’ll want to pay bills on time, especially if you’re applying for a mortgage in the near future. A good strategy for avoiding late payments is to set up automatic payments, which takes human error — or forgetfulness — out of the equation.
• Use less of your available credit. Lenders look at your credit utilization ratio to see how much of your credit you’re using. This figure accounts for about 30% of your credit score. To calculate it, divide your total debts by your total credit limit. A common rule of thumb is to keep your credit utilization ratio at 30% or less.
• Seek out a credit counselor. There are many credit counseling agencies that can help you improve your score if you have poor credit. These agencies are typically nonprofit groups that help you assess your situation and develop a plan for improving your credit. You can find nonprofit credit counseling organizations through the National Foundation for Credit Counseling. Be sure to check the credentials of the agency. The Department of Justice has a page devoted to accredited credit repair agencies.

Another useful way to boost your credit score — especially if you want to buy a house with no credit — is to pay bills such as utilities or cellphone services with a credit card, and then pay off the balance every month. This ensures that payment activity for those bills is included in your credit score. You also can get credit for those payments through programs such as Experian Boost, which uses your bank records to document regular payments and include that data in your credit score.

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How To Lower Your Monthly Mortgage Payment When Refinancing

Refinancing is a common way to lower mortgage payments. When you refinance a mortgage, you’re taking out a new loan with different terms and paying off your current loan.

Reduce your interest rate

One of the most effective ways to lower your mortgage payment is to refinance your mortgage at a better interest rate. Getting a reduced mortgage rate because the federal funds rate has declined is one of the main reasons why homeowners refinance their mortgage.

Since each monthly payment is made up of principal and interest, reducing the interest rate on your loan will result in a lower mortgage payment.

Extend your loan term

Another method for lowering your mortgage payment is to extend the term of your loan. Most terms are 30 or 15 years. If you’ve been paying your mortgage for 10 years, and you have 20 years to go, adding 10 years to the term and spreading out the amount you still owe over that time will reduce your monthly payment. The downside is you’ll be paying the loan for 10 more years, and you’ll likely pay more interest over the life of the loan.

Switch between a fixed-rate and adjustable-rate mortgage

Unlike fixed-rate mortgages, which have the same interest rate for the entire term of the loan, the interest rate on an adjustable-rate mortgage adjusts on a regular schedule.

Most ARMs offer an introductory interest rate that’s fixed for three, five, or seven years, after which the rate adjusts once a year. While the introductory rates on ARMs are usually lower than for fixed-rate mortgages, an ARM could cost you more in the long run if interest rates go up. Refinancing to a fixed-rate mortgage, if qualified, would protect you from rate hikes that could increase your monthly payment.

On the other hand, switching from a fixed-rate mortgage to an ARM can help you save money. This works especially well if you get an introductory rate on an ARM that’s lower than the interest rates on fixed-rate loans, and plan to sell your home before the rate is scheduled to adjust.

Get a streamline refinance

One of the drawbacks to refinancing is that you’re taking out a new mortgage with closing costs, which cost about $5,000 on average. But homeowners with loans backed by the Federal Housing Administration, Veterans Affairs, or the Department of Agriculture can reduce that cost significantly with what’s called a streamline refinance.

“Streamline refinance is available on many FHA, VA, and USDA home loans,” says Ben Fisher, a real estate investor and owner of The Fisher Group, based in Park City, Utah. “They provide lots of benefits like not checking the home appraisals, re-check the income, and many more.”

As a result, the loan can be closed faster and with less paperwork.

Here are some of the options for getting a streamline refinance.

FHA streamline refinance

If you have an FHA-backed mortgage and are qualified, you can get an FHA streamline refinance, which requires limited borrower credit documentation and underwriting when compared with refinancing a traditional mortgage.

To get an FHA streamline refinance, you must have a current FHA loan that isn’t delinquent. The refinance has a $500 limit on how much cash you can take out of your equity, which is the difference between what your home is worth and how much you owe on it.

There are two types of FHA streamline refinances:

• A credit-qualifying loan is required when taking a borrower off the loan, and requires income documentation and a credit check.
• No credit check is required for a non-credit-qualifying loan.

USDA streamline assist

The USDA is another source for streamline refinancing. Similar to the FHA streamline refinance process, the USDA’s streamline refinance program requires:

• No new appraisal.
• No credit review, though the program must verify that you’ve paid your mortgage for 12 months prior to the streamline finance application.
• No home inspections or calculation of debt ratios.

Plus, qualified borrowers get at least a $50 net reduction to principal, interest, property taxes, and homeowners insurance payments compared with their current payments on all of those.

VA IRRRL

VA loans are only available to active-duty military service members, reserve service members, veterans, and their surviving spouses. But if you have a VA loan and are qualified, you can take advantage of an interest rate reduction refinance loan, better known as an IRRRL.

You need to use this loan to refinance a current VA-backed mortgage for your primary residence. If you meet these requirements, you could reap the benefits of a lower mortgage payment, thanks to a better interest rate. What’s more, you can use the IRRRL program to make your monthly mortgage payments more stable by converting an ARM to a fixed-rate loan.

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Other Ways To Lower Your Monthly Payment

Here are some other ways to get a lower mortgage payment.

Remove mortgage insurance

Mortgage insurance is a fee that homeowners pay to offset the lender’s risk of extending a loan to a homebuyer who makes a smaller down payment or poses other financial risks. Here’s how to lower your mortgage payment by avoiding or getting rid of mortgage insurance.

Private mortgage insurance

Most lenders require you to pay for private mortgage insurance, which protects them against losses in case you default on the loan, when you buy a home with a down payment that’s less than 20% of the purchase price. This rule also applies to your equity when you refinance.

“Mortgage insurance can add a lot of money to your monthly payment.,” says Ryan Fitzgerald, a real estate broker and owner of Uphomes, located in Charlotte, North Carolina. “What type of loan you have will determine whether you can get rid of it.”

The main way to avoid paying PMI is to put down more than 20% of the purchase price of the home. When it comes to refinancing a mortgage and avoiding PMI, a good move is to wait until you’ve reached at least 20% equity. Once you have at least 20% equity, you can refinance to remove PMI and get a lower mortgage payment — although the principal and interest will remain unchanged — or you can ask your lender to remove it.

“Simply hitting 20% will not automatically stop the PMI charges, you have to reach out to the lender and ask,” Fitzgerald says.

FHA mortgage insurance

Homeowners with FHA loans must pay mortgage insurance premiums, known as MIP. Where conventional mortgages require PMI with a down payment of less than 20%, FHA loans require all borrowers to make both an upfront mortgage insurance payment — paid at closing — and an annual MIP payment.

Getting rid of FHA mortgage insurance can be tricky. One of the key factors to determine if you can cancel MIP is the origination date of your mortgage:

• July 1991 to December 2000: If your origination date falls between these two markers, you cannot cancel MIP for your FHA loan.
• January 2001 to June 3, 2013: Your MIP will be canceled once you reach a loan-to-value ratio of 78%.
• June 3, 2013, to present: Your MIP can be canceled only if you made a down payment of at least 10%, and after you’ve paid the loan for 11 years.

Shop for cheaper homeowners insurance

Most homeowners use an escrow or impound account that collects additional funds alongside their mortgage payment to pay for property taxes and homeowners insurance. Finding ways to reduce your homeowners insurance costs can lower your monthly mortgage payment.

“Get quotes from several different insurers and compare rates, so that you can get the best deal possible,” says Rinal Patel, a Realtor and co-founder of We Buy Philly Home, based in Philadelphia. “It’s also good to check with your local agent to see if they can offer you any discounts for multiple policies.”

Another way to save money on homeowners insurance is to raise your deductible, which should reduce your premiums.

“A higher deductible means that you’ll have to pay more out of pocket if something happens to your home, but it also means that your monthly premiums will be lower,” Patel says.

Appeal your property taxes

Reducing your property taxes to get a lower mortgage payment takes some ingenuity and research.

One way to reduce property taxes is to look for exemptions. State or local governments sometimes offer property tax exemptions that help homeowners by reducing or outright removing their property tax bill.

“Exemptions from property taxes are possible,” says Michel Cocke, a real estate investor and CEO of 253 Houses, based in Tacoma, Washington. “If you are a senior or veteran, you can be exempted. Similarly, a person with special disabilities will also be exempted.”

You also can appeal your property tax bill if you think it’s too high.

“Review your property tax bill and assessed value, as you might be able to argue a lower tax amount,” says Jon Bellemore, sales manager at Embrace Home Loans in Middletown, Rhode Island. “Additionally, some states allow you to obtain discounts based on military service, age, or homestead.”

Municipalities usually assess the value of homes annually. If you can show that the value of your home is lower than it was assessed for, you could make a case for reduced property taxes, Bellemore says.

Recast your mortgage

Recasting your mortgage makes sense when you’re able to make a significant lump-sum payment toward your loan balance, usually at least $5,000. Without changing the loan term or interest rate, your lender will recast or re-amortize the schedule of payments. This usually results in a lower monthly payment, and typically costs a few hundred dollars.

“Moreover, recasting does not involve a credit check, while refinancing does to determine eligibility,” says Michael Green, a real estate investor and owner of Quick Cash Homebuyers in Baltimore.

One of the advantages of recasting is that you’re not refinancing your mortgage, which means you don’t have to pay closing costs.

Apply for forbearance

Mortgage forbearance can be useful when homeowners are faced with unforeseen, disruptive events in their lives that make paying their mortgage very difficult. Forbearance is when your lender agrees you can make a reduced mortgage payment for a temporary period, or put a pause on paying your mortgage for a limited time.

The downside is that these payments aren’t forgiven — you’ll have to make up the missed or reduced payment amounts later. And interest will continue to accrue, costing you more money in the long run. Mortgage forbearance should be considered a last resort.

Requesting forbearance is fairly straightforward. Call your mortgage provider, explain the situation you’re facing, and ask about forbearance or hardship options. Your forbearance options vary depending on certain factors, such as the type of mortgage, your mortgage provider, and the owner requirements in your mortgage contract.

Apply for loan modification

Another option of last recourse for lowering your payment is to apply for mortgage loan modification. There are government programs that offer this service, but individual mortgage lenders do it as well.

“If all else fails and you’re having trouble paying your mortgage, ask for a mortgage modification,” Bellemore says. “This would extend your term to 40 or 50 years (in most cases) or take a large portion of principal off the front, lowering your payment. However, you will likely have a balloon payment due at the end to pay back what was taken off the front.”

Going this route can get you a lower mortgage payment, but it may cost you more in the end.

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The Bottom Line on Lowering Your Monthly Payment

No matter which type of loan you have, where you are on your homeowning journey, or what your financial situation is, there are ways to lower your monthly mortgage payment. Making a larger down payment, refinancing your mortgage at a lower interest rate, or adjusting the term of your current loan are potential options for saving you some money that you can put to other important uses.