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Nov 2017

Lowering Your Monthly Mortgage Payment: Before and After the Loan

Like many homebuyers or homeowners, your monthly payment is probably one of top things you consider when financing your home. Even if you’ve carefully saved and conservatively managed your affordability expectations, chances are, you’re still looking for the lowest monthly payment possible. Comparing lenders for the best interest rate is always a way to keep your monthly mortgage payment at its lowest, but there are several other ways to manage your costs after you’ve chosen a lender, and even after you’ve closed on your loan.

Reducing your payment before the loan

Larger down payment

First things first — a down payment is upfront, out-of-pocked money you pay to the home’s seller. It’s calculated as a percentage of the home’s total selling price. Generally, the more money you have to use as a down payment, the less money you’ll have to borrow. This means you’ll pay less in interest over the life of the loan, and you’ll have a lower monthly payment. Additionally, depending on your loan program, if you put down at least 20%, you could avoid possible mortgage insurance (explained more later), which is an additional monthly expense.

Buy down the rate

When your mortgage’s interest rate is determined, the cost of discount points and how many you’re able to purchase is assigned by your lender. Each point is based off a percentage of the total loan amount. Purchasing discount points give you the opportunity to “buy down” your interest rate by prepaying some of your interest and taking a percentage off your quoted interest rate — giving you a possible lower monthly payment. Discount points will vary from lender to lender, just like the interest rate. However, a common way discount points are presented is the cost of one discount point would be 1% of the loan amount. One discount point typically will reduce your interest rate by 25 basis points or 0.25% (but this can fluctuate). For example, let’s suggest your loan amount is $200,000 and you were quoted a 4% interest rate. One discount point may cost you $2,000 and reduce your rate to 3.75%.

Re-elevate your homeowners insurance

Your monthly mortgage payment is made up of your loan’s principle and interest, as well as taxes and insurance. You’ll be required to have homeowners insurance. This coverage is very important to cover both you and your lender against property loss due to fire, theft, or other damage. While you absolutely need homeowners insurance, you also have varying cost options. You want to make sure your coverage is up to par, but always shop around for multiple quotes from different insurance companies. This is one of the easiest ways to keep your monthly mortgage payment in your comfort zone, as the company and coverage is completely your choice. The other great news is that you’re never stuck with what you choose from the beginning. Once you have your loan, you can still change providers (or coverage if you want to stick with your current company), but just never let there be a lapse in homeowners insurance coverage.

Reducing your payment after the loan

Refinance your loan

Simply put, refinancing is repeating the mortgage process to obtain a new loan, while keeping the same home. Why might someone do this? Refinancing can allow you to shorten or lengthen your loan term, lower your interest rate, or have access to equity in your home.

For the purposes of reducing your monthly payment, both a longer loan term or a lower interest rate could result in a reduced a monthly payment.

Because refinancing is very similar to initially getting a mortgage, there are lot of common closing costs and fees associated with it, as well as borrower requirements such as credit and income checks. Even if your monthly mortgage payment may be lowered, you’ll want to weigh the short term cost versus long time gain to decide if refinancing is the right choice for you.

Recast your loan

Most homebuyers and owners have heard of refinancing, but far less are familiar with recasting. Unlike refinancing, mortgage recasting doesn’t change your interest rate or loan term. Instead, you can pay more toward the principle of your loan in one lump sum or through extra payments. Normally, this would just help you pay off your loan sooner. However, some loan servicers — if you request it — may allow you to recalculate your monthly mortgage payment based on your new lower loan balance. Recasting may come with a fee, but it typically requires far less borrower requirements than refinancing.

Remove mortgage insurance

For Conventional loans, if you put down less than 20%, you ‘ll be required to pay [Private Mortgage Insurance PMI , which is a monthly insurance that protects your lender in case you stop making payments. But this payment doesn’t have to last forever. If your loan balance drops below 80% of your home’s current market value, you can ask to have your PMI cancelled. There are a few stipulations. First, you must request the cancellation in writing. You also must have good payment history and be current on your payments. Additionally, you may have to prove that there are no liens on your home. And you’ll have to have an appraisal done to determine your home’s current value. Your mortgage banker is a great resource to help you achieve the lowest monthly payment. They should assist you before you close, and keep you updated on interest rate changes if there’s an opportunity for refinancing later down the road.