Can I lower my mortgage payment?
A high mortgage payment can feel like a burden, especially if your monthly budget is already tight. And the pandemic has made things tougher for many homeowners.
Luckily, there are plenty of ways to lower your monthly mortgage payment.
The easiest way is to refinance. With mortgage rates still low and home equity rising nationwide, millions of homeowners could lower their mortgage payments substantially.
Ready to see what you could save?
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4 ways to lower your mortgage payments with a refinance
Refinancing your mortgage can have huge financial benefits — especially if you’re strategic about it. There are multiple refi programs to choose from, and using the right one can help maximize your savings.
Four ways to lower your monthly mortgage payment with a refinance include:
- Refinancing to a lower interest rate
- Refinancing into a longer loan term
- Switching from an ARM to an FRM
- Using a low-doc, Streamline Refinance
Let’s take a look at each refinance option in a little more detail.
Refinance to a lower interest rate
The primary reason homeowners refinance is to lower their mortgage interest rate. This lowers your monthly mortgage payments — but that’s not all. It can also save you thousands (or tens of thousands) over the full life of the loan.
“For example, say you have a 30-year loan with a $200,000 balance at a 3.75% interest rate,” explains Eileen Derks, head of mortgages at Laurel Road. “If you refinance at a 2.75% interest rate, you’ll lower your monthly payment by [about] $100 and save $39,500 in total interest payments over the life of the loan.”
If you’ve had your existing mortgage for over two years — or if your finances have improved since you bought your home — there’s a good chance you could qualify for a lower rate and substantial monthly savings.
Extend your loan term
Another option is to refinance and extend your term, which is the amount of time you have to pay off your loan. The advantage here is that you will lower your monthly payment and provide additional monthly cash flow.
“Let’s assume you have a current loan balance of $250,000, at a 3.25% interest rate, with 18 years remaining on your loan. Your current monthly payment is approximately $1,532,” says Derks.
“By refinancing to a new term of 30 years, still at a 3.25% interest rate, your new monthly payment would be approximately $1,088, providing extra monthly cash flow of about $442.”
This strategy can work even if you already have a low interest rate. Just note, you could end up paying more in total interest. But if your main goal is a lower monthly mortgage payment, that might not matter.
Refinance to a fixed-rate mortgage
Perhaps you have an adjustable-rate mortgage (ARM), which offers a fixed rate for the first few years of your loan with a variable interest rate thereafter. While your rate may go down, it can also spike up, leading to much higher monthly payments than you can comfortably afford.
But if you refinance to a new fixed-rate mortgage loan, you eliminate the uncertainty of variable rates and can possibly save more money over the life of your loan.
“Say you have an adjustable-rate 30-year mortgage loan with a $200,000 original balance and a 2.5% interest rate that is about to jump, after your first five years, to a 3.5% interest rate,” says Derks.
“In this scenario, your monthly payment would increase from around $790 to approximately $881 — nearly $100 more per month because of the rate adjustment.
“But if you refinance to a new 25-year fixed-rate loan, which would not add any extra years to your term, and locked in at a 2.75% interest rate that rolls in your $4,000 closing costs, your monthly payment would be $830. This would allow you to save $50 per month compared to not refinancing.”
Refinancing from an ARM to a fixed-rate mortgage might not yield huge monthly savings. But it does give you additional financial security because you won’t have to worry about your rate or payment increasing in the future.
Use a Streamline Refinance
A fourth choice is to consider a Streamline Refinance, available on many FHA, VA, and USDA home loans.
With a Streamline Refinance, the lender is not obligated to re-check your income, credit, or employment. That means the loan can close much more quickly and possibly avoid a lot of paperwork.
What’s more, with a Streamline refi, you can skip the home appraisal. That means you can refinance with little to no home equity accrued — and you may lock in a lower rate than you would with other types of low refinancing.
“With a Streamline Refinance, the lender is usually not allowed to add closing costs to the loan balance, and the interest rate and monthly payment must be lowered enough to make it worthwhile for the borrower,” adds Derks.
“Essentially, a Streamline refi allows the borrower to obtain a lower rate and payment for very little cost and very little effort,” she explains.
Benefits of a lower monthly mortgage payment
“The main advantage of lowering your monthly mortgage payment is that allows you additional household cash flow that can be used for several things,” says Cindy Laffey, branch partner and mortgage planner at Inlanta Mortgage in Pewaukee, WI.
Laffey explains that saving on your mortgage can allow you to:
- Pay off other higher interest rate loans and credit cards faster
- Build a nest egg of savings for unexpected expenses and home repairs
- Increase savings for education and/or retirement
- Better managing increasing costs for property taxes and homeowners insurance
If you need some extra cash flow each month — for these reasons or any other — refinancing your mortgage could be a huge help.
Who qualifies for a refinance?
Many borrowers who currently have a mortgage loan are eligible to refinance.
According to Khari Washington, mortgage broker and owner of 1st United Realty & Mortgage, the requirements for refinancing a loan are similar to those for purchasing a home. Washington says a lender will look at:
- Your debt-to-income ratio (DTI)
- Your credit score
- The equity in your home
- The stability of your income
- Your current home value
You should also understand the costs and benefits of a refinance to decide if it’s right for your situation.
Keep in mind that you will pay refinance closing costs, which are typically 2-6% of your loan amount. The average refinancing closing costs across the country are $5,749, per recent data from ClosingCorp, a real estate data and technology firm.
To find out if a refinance is worth it for you, compare your estimated closing costs with your monthly savings. If you’ll save more in the long run than you spend upfront, a refinance is typically worth it.
Can I lower my mortgage payment without refinancing?
A refinance is the main way to lower your monthly mortgage payments. But it’s not the only option.
Some homeowners might not qualify for a refinance. Others might not want to pursue a refi because of the closing costs.
Whatever the case, there are a few additional strategies worth exploring:
Recast your mortgage
Recasting your loan involves applying a large lump sum payment to your loan principal and maintaining the same maturity (payoff) date.
“This alters the re-amortization schedule of your loan and, subsequently, reduces principal and interest due each month without having to refinance, making this a very low-cost and efficient option,” suggests Derks.
This might be an option if you’ve recently had a large windfall of cash — for instance, from an inheritance or a big bonus at work.
If you’re interested in recasting your mortgage, talk to your loan servicer (the company to which you make mortgage payments). They’ll be able to walk you through your options.
Temporarily pause your loan with forbearance
You may also be able to pause your loan via forbearance if you’ve experienced a temporary hardship and loss of income.
“The recent shutdowns due to COVID-19 have prompted many borrowers to pause their loans. However, while a forbearance will allow you to postpone payments on your mortgage, it does not allow you to skip the payments altogether,” says Laffey.
Indeed, when the forbearance period ends, you’ll have to repay any missed-reduced payments or work with your lender on the most appropriate solution for repayment, according to your financial circumstances.
“That’s why forbearance is not typically recommended, as it can prevent you from refinancing and impact your credit scores,” cautions Derks.
Ask about a loan modification
Alternatively, you can explore a loan modification, which can extend your loan’s term and/or lower your interest rate, if you qualify.
“Those are options that are sometimes granted by loan servicers to help borrowers avoid foreclosure and prevent losing their homes due to circumstances that may or may not have been under their control,” Laffey explains.
To be eligible, you’ll likely need to provide supporting documentation — including proof of hardship, evidence of income, bank statements, and more.
These aren’t the only ways to lower your monthly mortgage payments. Andrea Woroch, a California-based finance expert, recommends two other methods.
“If you are paying private mortgage insurance (PMI), likely because you put less than 20% toward your down payment, you may be able to eliminate PMI by requesting an appraisal on your home,” she says.
“If your home value has jumped significantly since you first purchased it, that may be enough to qualify for PMI removal.”
Additionally, it pays to review your homeowners insurance policy since you first bought your home or if it’s been a few years.
“You could be overlooking one of the fastest and easiest ways to reduce your monthly mortgage payment, assuming you are paying it through escrow. That’s because insurance costs tend to go up every couple of years,” Woroch says.
“If you learn that your policy premiums went up, contact your insurance company to learn if you qualify for a cheaper rate or shop around for a cheaper policy.”
Recap: 9 ways to lower your monthly mortgage payment
To recap, here are 9 ways you can lower your monthly mortgage payment — with or without a refinance:
- Lower your interest rate with a refi
- Extend your loan term
- Switch from an ARM to an FRM
- Use a Streamline Refinance
- Recast your mortgage
- Ask about a forbearance plan
- Ask for a loan modification
- Remove mortgage insurance
- Lower your homeowners insurance rate
The good news is that, with mortgage rates sticking near historic lows, many homeowners are still eligible to refinance.
“I advise that you talk to a qualified mortgage planner or loan officer who can provide you with a mortgage plan that best meets your needs,” Laffey recommends.
Keep in mind that lowering your interest rate even a fraction of a percent can generate surprisingly big monthly savings.
So even if you’re not sure whether you’d qualify, it’s worth talking to a lender about your options.