How Can You Lower Your Monthly Mortgage Payment?

Your monthly mortgage payment is likely your biggest expense. Therefore, you might want to lower your payment to free up funds to meet other financial goals.

A mortgage payment consists of four parts: principal, interest, property taxes, and homeowner’s or private mortgage insurance (PITI). Reducing one or more of these factors lowers your monthly mortgage payment.

The following options can lower your monthly mortgage payment.

1. Refinance Your Mortgage with a Lower Interest Rate

Refinancing replaces your current mortgage with a new one. A basic rate and term refinance can offer a lower interest rate, a longer loan term, or both.

The following factors impact whether you can or might want to refinance your mortgage:

• Current refinance interest rates: Look for a drop of at least 1 percentage point. Because fees and closing costs are included when refinancing, consider whether the interest rates are low enough to justify the change.

• How long you plan to be in your home: Determine whether you intend to stay in your home long enough to recoup the refinance closing costs, typically at least two years.

• Penalties for paying off your mortgage early: Read your mortgage terms to determine whether there is a prepayment penalty for early repayment, especially if your mortgage originated less than three years ago. If there is a penalty, you might not want to refinance.

• Age of your mortgage: Many lenders don’t allow refinances for mortgages that closed within four to five months. However, if your amortization schedule, which shows how the loan is paid off over time, still includes interest-heavy payments, you might consider refinancing.

2. Recast Your Mortgage  

Mortgage recasting involves making a lump sum payment toward your mortgage principal. Then, your lender recalculates your monthly payments based on the new balance and with the same loan term. The reduced mortgage amount means smaller monthly payments and less interest paid over the course of the loan.

Be aware that most lenders charge a recasting fee, typically $250 to $500. Do the math to ensure this decision aligns with your financial situation.

3. Eliminate Your Private Mortgage Insurance

Most lenders require private mortgage insurance (PMI) if your down payment is less than 20% of the home purchase price. This expense typically costs 0.46% and 1.5% of the loan amount each month, depending on your credit score.

You can request to remove the PMI when you have 20% equity in your home, which will lower your monthly mortgage payment. You might need to pay for a home appraisal, and a two-year seasoning requirement is included, meaning your mortgage must be at least that old before you can have the PMI removed.

4. Modify Your Loan

The government offers loan modification programs to reduce financial hardships. A modification typically changes the loan rate, term, or both to create more affordable monthly payments with the same mortgage.

For instance, you might extend a 30-year mortgage into a 40-year loan for lower payments spread over an additional decade. However, you’ll spend more in interest, increasing the total cost of the loan.

Be aware that not every lender allows loan modifications, and the eligibility rules are stringent. Even if you receive a loan modification, the difference might be too small to justify the increased cost of the loan.

5. Lower Your Property Taxes

Property tax assessments can be too high after the following events:

• Real estate market corrections: Property values moderately decline after a period of rapid growth. Market corrections bring home prices back to a more sustainable and affordable level. 

• Local rezonings: Official changes to the land-use classification of specific properties within a municipality, such as a city or county.  

• Increased spending by local government: Higher taxes can result from local or state budget decisions to fund services, such as schools, police, fire, or infrastructure improvements.

If you believe your property tax assessment is too high, consider appealing your property value to the relevant state or local decision-makers. Be sure to file your appeal before the deadline.

6. Look for a Lower Homeowner’s Insurance Rate

Shop around for a better homeowner’s insurance rate to lower your monthly mortgage payments:

• Compare quotes from reputable providers.

• Inquire about any discounts for which you qualify.

• Review the rate quotes to ensure the coverage included is comparable to your current policy.

• Ask about other methods to reduce your costs, such as increasing your deductible.

*This information is for educational purposes only.