If you’re like many other Americans, mortgage payments are probably the biggest monthly expense on your budget. But how does reducing your monthly mortgage payments sound? Pretty good, right? If you’re finding it a bit tough to comfortably pay your monthly mortgage payments, there may be a way for you to save off a few bucks.
1. Pay Your Mortgage Insurance Up-Front
If you apply for a conventional mortgage, you’ll have to pay Private Mortgage Insurance (PMI) if you put less than 20 percent towards a down payment. Most buyers end up having this extra insurance fee tacked on to their regular mortgage payments.
If you’ve got the liquid cash, you can choose to pay this insurance fee upfront in full without getting stuck paying extra money each month. If you’re planning on staying in the home for at least three years, paying the PMI upfront could be a viable option.
Private mortgage insurance usually costs anywhere between 0.5% to 1% of the whole mortgage amount on an annual basis. Let’s say you’ve been approved for a $200,000 mortgage and put less than 20% down towards the purchase price of a home in the form of a down payment. You would be subject to paying $2,000 based on a premium rate of 1%, or $166.67 every month.
Using an average premium rate of 1.75%, you would have to pay a one-time fee of $3,500 at closing without having to deal with pesky added fees on top of your mortgage payments. In exchange for paying more upfront, your payments would be reduced by $166.67 a month.
Of course, not everyone has this kind of liquid cash laying around to put towards paying an up-front insurance fee. However, if you can swing it, you can effectively increase your odds of getting approved for a mortgage, even with a higher loan-to-value ratio.
2. Eliminate Your PMI By Paying Dropping Your Mortgage Balance
If you pay your PMI insurance upfront, this fee will be tacked onto your monthly mortgage payments. However, there’s still an opportunity to get rid of this fee. As soon as your mortgage balance falls below 80% of the value of your home due to appreciation or repayment of the principal, you can request your lender to cancel your PMI payments.
If you’re able to put a sizeable amount of money towards the principal to the point that your mortgage falls under the 80% mark, ask the lender to have it appraised again. While you might be required to pay for the appraisal, it could save you hundreds of dollars off your monthly mortgage payments.
3. Refinance Your Mortgage
One of the most common ways to shave a little off your mortgage payments each month is to refinance to a lower interest rate. If you initially locked into your mortgage at a high rate, and the rate today is much lower, you can save a ton of money in interest payments.
For instance, if you are currently paying off a $200,000 at 5%, and you refinance your mortgage with a 3.5% rate, you can decrease your monthly payments by $175.55. Of course, you’ll have to factor in how much it will cost you to break your current mortgage before the term is up before you make the decision to refinance. If you’re looking at a $5,000 penalty fee, you can recoup that money in just over 28 months. In that case, refinancing may be worth consideration if you plan on owning your home for at least that amount of time.
4. Recast Your Mortgage
Some lenders may be willing to recast – or reset – your monthly mortgage payments if you find yourself in a financial predicament, such as being laid off. If your lender agrees to recast your mortgage, you’ll need to pay a lump sum towards your home loan, usually at least $5,000. Your lender will then amortize the remaining loan balance and recalculate your monthly payments, instead of just lowering the principal.
Let’s use the example of a $200,000 outstanding loan amount at 5% with 20 years left on the mortgage. If you apply $10,000 to recast the mortgage, you would effectively lower the loan amount to $190,000. In this case, the interest rate and amortization period don’t change, but the monthly mortgage payments do. In this case, you would be lowering your monthly mortgage payments from $1,314.25 to $1,248.54, a savings of $65.71 per month.
By the end of the 20 term, you would have realized a total reduction of $15,770.40. After factoring in the initial $10,000 applied to recast the mortgage, that would translate into a net savings of $5,770.40.
Recasting is similar to a refinance, but it usually takes longer because. By the time the lender processes the request, approves it, then implements the new payment, it could be months before you see any changes. Not only that, but lenders don’t have any obligations to recast, and have little motivation to do so as a result of the low fees they get from it. Just be prepared for a little red tape.
5. Pay Down Your Rate
If you plan on living in your home for a while, buying down your rate can be an option for you if you have the extra money handy. Paying down your rate involves purchasing one discount point for one percent of the cost of your home loan. The majority of lenders usually limit borrowers to buying three points.
With this approach, you’re basically paying some interest upfront in exchange for a lower interest rate. Every point you buy will lower your rate by 0.125% to 0.25% over the life of your mortgage. Not only will this slightly reduce your monthly loan payments, it can also translate into big savings over the life of the mortgage.
For instance, if you pay $2,000 to shave 0.25% off your current interest rate of 5% on a $200,000 mortgage, you can bring you current payments of $1,067.38 down to $1,037.72. That’s a savings of $29.66 each month.
Of course, you’ll need to calculate the break-even point, which is the point at which that initial $2,000 has been paid off. That’s why this method only works if you plan on staying in your home over the long haul. The longer you own the home, the more you benefit from buying down points because you would save more in interest over the life of the mortgage. Using the example above, it would take 67.43 months (or 5.62 years) to pay off that $2,000 used to buy down your rate.
You may be unnecessarily paying more towards your monthly mortgage payments, and can potentially save a few hundred bucks by revamping it. Talk to your mortgage specialist to find out how you can cut down on your mortgage payments to help stretch your budget, and put that extra cash towards beefing up your savings.
