Lower Mortgage Payment

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Overview

Whether it’s to downsize your monthly budget or to invest the savings elsewhere and potentially earn a more significant return, refinancing is an excellent opportunity to reduce your rate, achieve a lower mortgage payment, and create breathing room in your budget.

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10 mins
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I. Current Climate
II. Pros and Cons
III. When to Extend Term
IV. Refinance Strategies

V. Other Financial Means
VI. Can’t Afford Mortgage?
VII. Bottom Line

I. Current Market

Rising costs for goods and services have put a strain on household budgets. Housing is one of the highest costs in a budget. Finding ways to achieve a lower monthly payment now may help you avoid a more stressful situation in the future.

II. Pros and Cons

Extending the term on your mortgage is one of the more obvious ways to achieve a lower mortgage payment. By committing to a new 30-year term, you’ll likely lower your mortgage payments depending on how much equity you have in your home. However, with more time to pay off your loan comes more interest payments.

Pros of Extending Term

  • Maximize monthly cash flow. Gain flexibility with additional money each month to help you stay within budget.
  • Apply savings to other investments. Apply extra cash toward principal on your terms or possibly make contributions to your retirement or other assets.
  • Less risk of default. It’s easier to afford a lower mortgage payment, which reduces your risk of not paying in a given month.

Cons of Extending Term

  • Pay more interest. Accrue interest over a more extended period, which means you’ll build equity at a slower pace, pushing back the timeline on becoming mortgage-free. Long-term rates are usually higher than shorter-term rates because the lender assumes a higher risk that the mortgage won’t be paid.
  • Squander monthly savings. It’s human nature to spend more money as it becomes available. As you reallocate your newfound savings, be mindful of the decision you’ve made to extend the life of your mortgage.
  • Incur closing costs. Pay fees which could amount to 1-2% of your mortgage.

III. When to Extend Term

Here are three scenarios when a lower mortgage payment is beneficial:

  • When juggling other high-interest debt. While you may be able to afford payments on high-interest debt, extending the term allows you to make additional payments to chip away at more costly debt.
  • When you have other high yield investments. You may need more monthly cash to invest in a growing business or another investment. The benefit of today’s investment can outweigh an increase in interest payments over the life of the loan. Extending the loan term can lower your payment resulting in more cash to invest.
  • When you have problems trouble paying bills. Is money tight? Are you starting to fall behind with your current debt obligations? Give yourself more time to pay down your mortgage. Shift money toward your high-interest debt. Consider consolidating your high-interest debt using either a home equity line of credit (HELOC) a home equity loan (HELOAN), or cash-out refinance.

IV. Refinance Strategies

Here are seven alternative ways to get a lower mortgage payment:

  • Refinance to a lower rate. Has your credit score improved recently? Are mortgage rates lower now than they were when you bought your home or last refinanced? If yes, then you could try to qualify for a lower interest rate, which would save you a substantial amount. By lowering your interest rate by even a half-point, you could achieve a lower mortgage payment by hundreds of dollars. You could also save thousands in interest during the life of the loan.
  • Pay points to lower mortgage rate. Prepaying your interest upfront in the form of discount points will get you a lower rate. Typically, one point will cost 1% of your loan amount. Each point you purchase is usually a quarter percent rate reduction. Be mindful to determine the likelihood of selling your home soon or possibly needing to pull equity from your home in the form of a cash-out refinance. If that’s the case, you may determine paying points doesn’t make sense. Strong Home Mortgage can help determine your breakeven point, which is the amount of time you’d need to stay in your home before you recoup the cost.
  • Eliminate MIP/PMI as you refinance.  Mortgage insurance premiums (MIP) or private mortgage insurance (PMI) each protects the lender in the event of a default and can significantly increase your monthly payment. You may be eligible to eliminate PMI on a conventional loan during a refinance if your home has appreciated to the point where you owe less than 80% of the home’s new appraised value. Eliminating PMI will result in a lower mortgage payment. On an FHA loan, MIP takes the place of PMI. In some cases, refinancing from an FHA loan to a conventional loan may make sense to drop the MIP payments resulting in a lower monthly payment.
  • Refinance to a fixed-rate mortgage. When rates are on the rise (or likely to rise in the foreseeable future), it may make sense to convert an adjustable-rate mortgage (ARM) to a fixed rate. While interest rates for a fixed-rate mortgage are usually higher than rates on an adjustable-rate mortgage, there are some instances when you’ll be able to switch to a fixed-rate mortgage and still achieve a lower mortgage payment. While it may not dramatically reduce your mortgage, it may give you peace of mind and save you money in the long run. Should interest rates continue to rise, a fixed-rate mortgage would be desirable.
  • Opt for lender-paid PMI (ARM). If you haven’t quite hit the 80% Loan to Value (LTV) mark and wish to eliminate your PMI, you can opt for a lender-paid PMI. Your lender would cover it and charge you a slightly higher interest rate. The lower mortgage payment would be in exchange for paying more interest over the life of the loan.
  • Refinance to an adjustable-rate mortgage (ARM). Do you plan on moving within the next five years? It may not make sense to be locked into a 30-year fixed-term loan. A fixed-rate mortgage maintains the same interest rate for the life of the loan, but it’s usually higher than the initial interest rate on an ARM. With a 5/1 ARM, the rate is initially fixed for five years and then will fluctuate. Depending on whether you get a 5/1 or 7/1 ARM, you’ll get a fixed rate for the first five to seven years of your mortgage that may be lower than the interest rate on your current fixed-rate mortgage. However, this strategy comes with risks — especially if your income fluctuates and rates continue to rise.
  • Streamline refi. If you have an FHA or VA home loan, a streamline refinance to a lower mortgage payment may be an option. It provides a quick and easy way for homeowners with a VA or FHA loan to refinance a mortgage. The benefits of a streamlined refinance generally include minimal paperwork, an appraisal waiver, and no need to verify your income or credit. In addition, for those with an FHA loan, you may be eligible for a refund of up to 68% of the pre-paid MIP on your current FHA loan.

V. Other Financial Means

There are other ways to save money and reduce overall housing costs, which do not involve a refinance to a lower mortgage payment and may be worth exploring.

  • Recasting. A “recast” may be a good option if you can apply a lump sum payment toward your mortgage (usually $5,000 or more). Your lender will recalculate the monthly payment using a new amortization schedule based on your current principal and the number of years you have remaining on your existing mortgage. While there are no closing costs when you recast, you’ll need a lump sum of cash to apply towards your principal and may incur a fee from the servicer in the range of $250 to $500. Recasting isn’t an option if you have a VA or FHA loan. However, a streamlined refinance could be a great way to lower your rate if you have an FHA or VA home loan.
  • Eliminate private mortgage insurance (PMI) without refinancing. Some means to eliminate PMI on a conventional mortgage don’t require refinancing. If you’ve seen homes appreciate significantly in your neighborhood, then you could request a new appraisal. Should you have 22% equity in your home, your mortgage servicer would be required to eliminate PMI, thus generating a lower mortgage payment.
  • House hacking. Consider renting a room in your home. Better yet, carve out a portion of your home for a separate rental. This could require a certificate of occupancy from your local township. The money you’ll receive in rent could help offset your mortgage payment and put you on a course to building wealth and financial freedom.
  • Shop for lower insurance rates. If you haven’t revisited your homeowner’s insurance policy in a while, then now may be the time. You may save money by bundling multiple policies with the same carrier, getting credit for security systems, or simply rechecking your policy to make sure you’re not over-insured.

VI. Can’t Afford Mortgage?

There are times when your mortgage servicer may agree to a lower mortgage payment.

  • Mortgage Forbearance. If you’re experiencing financial hardship, then your mortgage servicer might agree to suspend or lower your mortgage payment. It’s essential to note that this will likely result in a negative effect on your credit score, and you’ll be required to pay back missed payments and interest accrued.
  • Loan Modification. Suppose you’ve experienced a financial hardship and your ability to make your monthly mortgage payment is diminished. In this scenario, you may decide to work with your mortgage servicer to restructure the loan to a lower mortgage payment you can reliably pay. It’s important to note that a loan modification may not always be approved and may also hurt your credit score. A refinance may be a better option if you’re current with your payments. Before you get behind, you should contact your lender or mortgage servicer to discuss the loss of a job, financial hardship, or unexpected retirement..

VII. Bottom Line

There may be several ways to obtain a lower mortgage payment. Extending the payment period term by refinancing could be your best option — but you’ll be pay more in interest over the long haul. See how much you could lower your mortgage. Connect with a loan officer below to determine where your new monthly mortgage payment might fall.

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By using this website, you agree to these Terms of Use. All content provided is for informational purposes only and subject to change. By refinancing your existing loan, the total finance charges may be higher over the life of the loan. Contact a loan officer to discuss your personal situation. Strong Home Mortgage does not offer goods or services to residents located in New York, Georgia, Nevada, or Missouri.

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