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