6 simple ways to reduce your mortgage payment

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It’s often said that your mortgage payment should be no more than 28% of your gross monthly pay. A really conservative take is that your payment should be no more than 25% of net monthly pay. In any case, here are suggestions to make your payments more palatable. A lower mortgage payment could mean lower blood pressure, not to mention the ability to pay down other debt, build investments and have a healthy emergency fund.

 

Related: What is a second mortgage?

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6 Ways to Lower Your Mortgage Payments

1. Give Your Mortgage a Bonus

If you get a bonus or a windfall, consider throwing some of that money at your mortgage. If you are in a position to make a major lump-sum payment on your home loan, you may benefit from mortgage recasting. With recasting, your lender will reamortize the mortgage but retain the interest rate and term. The new, smaller balance equates to lower monthly payments. Many lenders charge a servicing fee and have equity requirements to recast a mortgage.

 

Simpler options:

  • Make a lump-sum payment toward the mortgage principal.
  • Make extra payments on a schedule or whenever you can.

It’s a good idea to tell your lender that you want to put the extra money toward the principal and not the interest. Paying extra toward the principal provides two benefits: It will slowly reduce your monthly payment, and it will pare the total interest paid over the life of the loan.

2. Reap Rental Income at Home

There are at least two options here: “House hacking” and adding an accessory dwelling unit (ADU).

 

House hacking can mean buying a two- to four-unit multifamily building for little down and living in one of the units. Multifamily homes with up to four units are considered residential when it comes to financing. Owner-occupants can choose Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans or conventional financing. Some people house-hack a single-family home, which just translates to having housemates or short-term rental guests.

 

An ADU, aka an in-law suite, granny flat or carriage house, is a secondary dwelling unit on the same lot as a primary single-family home. It can be a detached cottage, a garage or basement conversion, or an attached unit.

 

With any addition or renovation, you might want to estimate return-on-investment — how much you’d charge and how long it would take to recoup the cash you put in before turning a profit.

3. Extend the Term of Your Mortgage

If your goal is to reduce your monthly payment — though not necessarily the overall cost of your mortgage — you may consider extending your mortgage term. For example, if you took out a 15-year mortgage, refinancing into a 30-year mortgage would amortize your payments over a longer term, thereby reducing your monthly payment. This technique could lower your monthly payment but likely will cost you more in interest in the long run.

 

Just because you have a new 30-year mortgage doesn’t mean you have to take 30 years to pay it off. You’re often allowed to pay off your mortgage early without a prepayment penalty by paying more toward the principal.

4. Get Rid of Mortgage Insurance

Mortgage insurance can add a significant amount to your monthly mortgage payments. Luckily, there are ways to eliminate these payments, depending on which type of loan you have.

Getting Rid of the FHA Mortgage Insurance Premium

Consider your loan origination date:

  • July 1991 to December 2000: If your loan was originated between these dates, you can’t cancel your MIP.
  • January 2001 to June 3, 2013: Your MIP can be canceled once you have 22% equity in your home.
  • June 3, 2013, and later: If you made a down payment of at least 10% percent, MIP will be canceled after 11 years. Otherwise, MIP will last for the life of the loan.

Another way to shed MIP is to refinance to a conventional loan with a private lender. Many FHA homeowners of late have enough equity to refinance.

Getting Rid of Private Mortgage Insurance

If you took out a conventional mortgage with less than 20% down, you’re likely paying PMI. Ditching your PMI is an excellent way to reduce your monthly bill. To request that your PMI be eliminated, you’ll want to have 20% equity in your home, whether through your own payments or through home appreciation.

 

Your lender must automatically terminate PMI on the date when your principal balance reaches 78% of the original value of your home. Check with your lender or loan program to see when and if you can get rid of your PMI.

5. Appeal Your Property Taxes

Your property taxes are based on an assessment of your house and land conducted by your county’s tax assessor. The higher they value your property, the more taxes you’ll pay.

 

If you think you’re paying too much in taxes, you can appeal the assessment. If you do, be prepared with examples of comparable properties in your area valued at less than your home. Or you may also show a professional appraisal. To challenge an assessment, you can call your local tax assessor and ask about the appeals process.

6. Refinance Your Mortgage

One of the best ways to reduce monthly mortgage payments is to refinance your mortgage. Refinancing (not to be confused with a reverse mortgage) means replacing your current mortgage with a new one, with terms that better suit your current needs.

 

There are a number of signs that a mortgage refinance makes sense, such as an improved financial situation, the ability to lower your rate or the desire to secure a fixed rate.  Refinancing can result in a more favorable interest rate, a change in loan length, a reduced monthly payment and a substantial reduction in the amount you owe over the life of your mortgage.

The Takeaway

How to lower your mortgage payment? There are several possible ways. And who wouldn’t love a thinner house payment?

 

Learn more:

This article
originally appeared on 
SoFi.com and was
syndicated by
MediaFeed.org.

 

SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636. For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Tips when shopping for a mortgage

 

Shopping for a car: fun, freeing and full of fresh new smells. Shopping for a puppy: heartwarming and full of suspicious smells. Shopping for a mortgage: not particularly thrilling or fragrant but one of the most important decisions many consumers will make in a lifetime.

 

From assessing what they can afford to nailing down a mortgage type, researching the best rates, and ultimately securing a loan, homebuyers must take many steps when shopping for a home loan.

 

Here are a few tips and tricks on how to shop for a mortgage loan and what to expect along the way.

 

Related: What Is an assumable mortgage?

 

 

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Reviewing monthly spending and estimating how much they can afford is one way for mortgage shoppers to kick off the homebuying process.

A budget or worksheet can be particularly helpful in determining what’s possible, with line items for the mortgage payment, property taxes, insurance, utilities, maintenance, and funds set aside for emergencies.

 

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mortgage calculator is useful for estimating the real cost of a home purchase, allowing consumers to plug and play with the components that comprise a monthly mortgage payment:

  • Loan type
  • Mortgage principal
  • Mortgage interest rate
  • Down payment amount
  • Loan term
  • Estimated property tax
  • Private mortgage insurance, or PMI
  • Homeowners insurance
  • Homeowners association fees

Most mortgage calculators allow homebuyers to enter their credit score for a more accurate estimate. Checking your current credit score can help you determine what type of loan you qualify for.

 

 

Chainarong Prasertthai // istockphoto

 

In many cases, a higher credit score can help buyers get a lower interest rate, while a lower credit score could mean higher interest rates or the need for a larger down payment.

 

Knowing this information can help consumers estimate what range of quotes to expect from mortgage lenders or brokers before they start shopping for a mortgage loan.

 

SARINYAPINNGAM / istockphoto

 

One of the first steps a homebuyer might take when shopping for a mortgage is deciding which type of mortgage loan to apply for.

 

This process could require some diligent comparison shopping to consider the pros and cons of each option alongside financial and personal needs.

 

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A conventional fixed-rate mortgage offers the same interest rate and monthly payment for the entire term of the loan—typically 15 or 30 years.

 

 

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ARMs generally offer lower interest rates than fixed-rate mortgages, but only for a certain time, such as five or 10 years. After that, the monthly payments will adjust to current interest rates.

 

 

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A no down payment loan allows buyers to purchase a house with zero money down at closing, except for the standard closing costs.

 

 

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An FHA loan is a government-backed loan that allows qualified buyers to put down as little as 3.5% if they meet several requirements, including the payment of mortgage insurance and a limit to the amount of the FHA loan.

 

 

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A VA loan is a government-backed loan that allows no down payment and no mortgage insurance for veterans who have served 90 consecutive days during wartime, 180 consecutive days during peacetime, or six years in the reserves.

 

 

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A USDA Rural Development loan is a government-backed loan for families in rural areas who are trying to put homeownership within reach. As long as buyers’ debt loads don’t exceed their income by more than 41%, they can enjoy a discounted mortgage interest rate and no down payment.

 

 

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Once mortgage shoppers have a better idea of their financial bandwidth and preferred mortgage type, they can begin researching the optimum rates and deals they can get on a home loan.

 

Mortgage lenders and brokers might offer different interest rates and fees to different consumers depending on the day, even when they have the same exact qualifications. That’s why it can be important not only to understand mortgage basics but to compare what an array of mortgage lenders and brokers are able to quote in the loan estimate.

 

It can be prudent to bear in mind that mortgage lenders and brokers receive a profit from the loan issuance, so they might be motivated to get consumers to agree to loans with higher fees, interest rates, or origination points.

 

Shopping around for the best interest rates and deals is a proactive way for homebuyers to avoid more expensive loans and ensure they can strike a deal they’re comfortable with.

 

designer491 / istockphoto

 

When wondering how to shop for a mortgage lender, it can be useful to start by distinguishing between a direct lender and a mortgage broker:

  • A direct lender is a financial institution that assesses whether a buyer qualifies for a loan and offers them the funds directly.
  • A mortgage broker is an intermediary between the buyer and financial institution who helps the buyer identify the best direct lender and compiles the information for the mortgage application.

Long story short, mortgage brokers help homebuyers comparison-shop by culling together multiple lender quotes and presenting them all at once. This can be helpful for buyers who don’t want to deal with contacting multiple lenders. That said, the broker typically takes a commission, covered by the buyer, based on the mortgage amount.

 

In the case of working with a direct lender, it can be a good idea for buyers to deal with a financial institution they already have a relationship with.

 

Depositphotos

 

Sometimes a list of questions can be useful when considering whether a mortgage lender or broker is the right fit.

 

A few constructive questions could be:

  • How is the lender getting paid? It’s fairly common for a mortgage broker to get paid a commission on closed transactions. Asking them whether the fee is embedded in the loan origination fee or how their compensation will be facilitated can help make these costs more transparent to the buyer.
  • Can they offer competitive interest rates? If so, how long can they lock them in? While mortgage rates tend to be standard across the industry, lender rates can fluctuate based on the buyer’s credit score and financial history. Once the rate is locked in, there’s a guarantee from the lender that they’ll stay the same for a specific period of time, regardless of industry wide fluctuations. Finding out if the lender is willing to offer the best rate and lock it in for 30 to 60 days can help buyers know that they’re covered until closing time.
  • What are the typical business hours? Whether it’s a broker or a lender, finding out their availability can be good to determine in advance, especially since many home showings and offers happen on weekends and could require a tight turnaround time.
  • Can they provide a breakdown based on different down payment amounts? It can be useful for buyers to see a wide range of cost comparisons when shopping for a loan. Can the lender provide multiple scenarios with different down payment amounts, interest rates, and fees so the buyer can have a knowledgeable conversation about their budget and what’s possible?
  • What’s the loan processing time? Asking about the anticipated turnaround time for processing the loan (usually around 43 days) can help determine whether the lender will be able to execute the purchase and sale agreement in time for closing.
  • What fees and closing costs can be expected? Inquiring about expected charges is an important way for buyers to ensure no surprises or hidden transaction fees down the line. From origination fees charged by the lender to cover the loan processing to closing costs such as home inspection and appraisal fees, HOA fees or title service fees, a loan estimate can help lay out which charges can be negotiated and which ones are fixed.

 

Tirachard/istockphoto

 

Depending on the loan type, APR rate, whether the interest rate is adjustable or fixed, the down payment option, and potential prepayment penalties or balloon payments, mortgages have many different benefits and risks associated with their purchase.

 

Working with a lender to calculate how much monthly payments are estimated at currently, five years from now, 10 years from now, etc., can help mitigate potential risks and outline the benefits of certain terms and conditions.

 

mortgage worksheet is one way to help illuminate the potential upsides and downsides of a particular mortgage loan alongside the lender.

 

designer491 / istockphoto

 

After a suitable sampling of lenders have provided detailed mortgage loan quotes, consumers can compare costs and terms and negotiate the best deal. The mortgage worksheet can be helpful in this part of the process as well.

 

By being transparent about the fact that they’re shopping around for the best quote, can incite lenders and brokers to compete with one another in offering the most favorable option.

 

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Once comparisons and negotiations whittle the list of quotes to a few, consumers might wish to consult with reliable sources like family members, housing counselors, or real estate attorneys to weigh in on the impending agreement.

 

Since getting a mortgage loan is often considered one of the most expensive commitments many consumers will make in their lifetime, there’s no harm in asking for a little help when making the decision.

 

Whether it’s a friend who already knows how to shop around for a mortgage or an opinion leader in the buyer’s close personal network, mortgage shoppers might want to review their loan documents with a trusted, well-informed source before they sign anything.

 

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While getting prequalified for a loan involves consumers submitting their financial information and receiving an estimate of what the lender could potentially offer, preapproval means the lender has conducted a full review of the consumer’s income and credit history and approved a specific loan amount for, typically, 60 to 90 days.

 

This approval usually comes in the form of a letter.

Homebuyers can benefit from getting preapproved for a mortgage in many ways. Not only does it offer them the opportunity to discuss loan options with the lender, but it also helps them understand their budget and the maximum amount they could borrow.

 

In some cases, a preapproval letter also indicates serious intention to purchase a property. This can prove particularly helpful in competitive markets and bidding wars. Sellers will often go with a preapproved buyer over a prequalified buyer, since the loan will need to be approved for the final purchase regardless.

 

Deposit Photos

 

How to shop for a mortgage? First, figure out how much you can comfortably afford, and then choose a loan type, research interest rates, and compare what lenders offer. Finding the right loan is as important as choosing the right home.

 

Learn More:

This article
originally appeared on 
SoFi.comand was
syndicated by
MediaFeed.org.

 

SoFi Loan Products

SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636  . For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Home Loans

Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

 

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Featured Image Credit: Chainarong Prasertthai // istockphoto.

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