6 Ways to Lower Your Mortgage Payment

See If You Can Reduce Your Monthly Mortgage Costs

For many families, their monthly mortgage payment is their biggest expense. The good news is, if you are looking into how to lower your mortgage payment, there are options available to you.

This guide will help you explore six ways to reduce your home loan costs, so you'll have more flexibility in your monthly budget. Options include refinancing, reducing insurance costs, and more.

1. Refinance to a Lower Interest Rate

Refinancing to a lower interest rate is one of the most common ways you can lower your mortgage payment.

Refinancing involves getting a new loan to pay off your existing mortgage. If you can qualify for a new loan at a lower rate, your total borrowing costs and monthly payments may be cheaper, depending on the repayment term of your new loan.

To understand how refinancing lowers your mortgage payment, let's look at an example. Say you have a $400,000 mortgage at 7.25% with 29 years left on a 30-year loan, and you refinance to a new 30-year loan at 6.25%. You could save $222.93 in monthly payments and pay $55,055.30 less in interest if you refinance.

To run your own numbers and see how a new loan could change the monthly payment and repayment time compared to your current loan, check out our Refinance Calculator.

Strategies to Secure a Lower Interest Rate

Qualifying for a new loan at a lower interest rate is key to saving money on your mortgage payment when refinancing. Some of the best ways to qualify for a lower rate include the following:

• Improve your credit score: A higher score leads to a better rate because you're seen as a less risky borrower. You can improve your score by paying down debt and having errors removed from your credit history.
• Buy mortgage discount points: Discount points allow you to buy down your rate. A point costs 1% of your loan amount and lowers your rate by 0.25%.
• Pay off other debt: Reducing your debt improves your debt-to-income ratio (DTI), which is your debt relative to your income. A lower DTI means you're viewed as a less risky borrower, so you're likely to qualify for a lower rate.

2. Refinance to a Longer Loan Term

Another way to lower your mortgage payment is to refinance to a longer loan term. Refinancing to a longer term reduces your monthly costs even if you can't change your interest rate, because you have more time to repay what you owe.

If you owe $300,000 and have only 15 years to repay the entire amount, you'll have to pay more each month than if you had 30 years. For example, a $400,000 15-year loan at 6% comes with monthly payments of $3,375.43, while a $400,000 30-year loan at 6% has a monthly payment of $2,398.20.

However, it is important to understand that making your repayment timeline longer will likely increase the total amount you’ll pay in interest over the life of your loan. That’s because you pay interest for much longer. In this case, lowering your mortgage payment doesn’t mean that you are saving money over time, even though your monthly costs are lower.

3. Pay Extra on Your Mortgage

Unlike a credit card, your mortgage probably has a set monthly payment that doesn't change over the life of the loan. Paying more than the required amount one month doesn't mean you will have a lower payment amount the next. However, paying extra on your mortgage each month could help you pay off your mortgage faster and eliminate monthly mortgage payments sooner.

If you make a large lump sum payment, some mortgage lenders may also allow you to recast your mortgage without refinancing. That means your lender recalculates your monthly payments to account for the fact that your principal balance is now notably lower due to the lump sum payment. There's usually a fee for this, but it can help you lower your costs.

There are different ways to pay extra on your mortgage if you decide to take this approach, including paying more each month, making a bi-weekly mortgage payment, or paying your loan every two weeks instead of once a month. Since most months have more than 28 days, this has the effect of allowing you to make the equivalent of one full extra mortgage payment each year.

4. Check Your Homeowners Insurance

Your mortgage payment may include more than just principal and interest. Lenders typically require you to have homeowners insurance and may require you to make monthly payments toward the premium cost. This money is put into escrow and used to pay the insurer when the premiums are due.

If you can lower your insurance premiums, you won't have to contribute as much each month to cover the cost of your premiums.

You may be able to reduce insurance premiums by shopping for a new plan or speaking to your current insurance company about lowering your premiums.

5. Review Your Property Taxes

Most lenders also require you to make payments toward your property taxes in your monthly bill, which they keep in an escrow account.

In general, homeowners have limited control over the amount they pay in property taxes, so lowering your property taxes isn't usually an option.

However, you could appeal your assessed value, which is the value your property taxes are based on. If you can lower the value, taxes should go down. You can also see if you're eligible for a homestead exemption or other property tax relief options in your area.

6. Get Rid of Mortgage Insurance

When you have a conventional loan, you’ll need to pay for private mortgage insurance (PMI) if your home equity is less than 20%.

However, you may be able to submit a request to cancel PMI once the principal balance of your loan reaches 80% of the original property value, and you’ve met certain conditions. Your lender is required to remove PMI from your mortgage when the principal balance of your loan reaches 78% of the original value of your property.

Keep in mind that it can be harder to remove the mortgage insurance that comes with FHA loans compared to conventional loans. If your initial down payment on an FHA loan was less than 10%, mortgage insurance is required for the life of the loan, so you can't get rid of it without refinancing.

Final Thoughts: Lower Your Monthly Mortgage Payment

As you can see, you have options when it comes to lowering your monthly mortgage payment. Consider the pros and cons of each to see if any of them will work for you.

Reach out to Freedom Mortgage to explore affordable loans, including refinancing solutions that can help you end up with a lower payment. Get prequalified today and see how much your new loan could cost relative to your old one.