HomeHome LoanHow to Keep Your Mortgage Payments as Low as Possible

How to Keep Your Mortgage Payments as Low as Possible

When finances are tight, one of the best ways of finding extra room in your budget is reducing your expenses. A typical one for the modern family is their mortgage repayments. If you find they are taking much more than you would like from your monthly income, you should consider lowering them. Let’s look at a few ways you can do this.


Apply for a Modification

Talk to your lender about a modification if you experience financial hardship or are in a situation that makes repaying the loan challenging. Contrary to what many people may think, you do not have to have defaulted or be behind on your payments to request one.

You can contact your lender if you think you will see a reduction in your income, for example, through retirement or a layoff.

If they approve the modification, the lender will find a way to reduce your monthly repayments while ensuring you can still pay for the loan by the end of your term.

Apply for Forbearance

In some situations, a loan modification might not be enough, and you can instead get temporary relief by applying for a forbearance. This is an agreement with your lender to reduce or suspend your monthly payments for a short period until your finances catch up or the situation improves.

A forbearance does not mean they will eliminate the loan because you still have to resume payments and catch up for those you missed during that period.

Also, you should contact your lender before missing any payments. They will not look too kindly at your situation if you come to them with the request after a default.

Refinance the Mortgage

A 1 or 2% reduction in your interest rate can make a huge difference in long-term fixed loans, such as 30-year plans. Start by watching the market to understand how interest rates are moving. If they are currently experiencing an upswing, do not consider this option. However, talk to a lender to see if you can get a new loan at this rate.

To qualify, you need enough equity in the home and to meet other requirements. Equity is the home’s market value minus the remaining mortgage. Additionally, you should set aside some funds to pay for the new loan’s closing costs.

If you have never done this before, you should contact a professional who will help you understand what it entails. Experienced mortgage lenders are happy to answer any questions and discuss your options so you can get a loan with favorable terms that will not stress you financially.

You can also refinance the mortgage to increase the loan term. Lenders can increase it to the original length, leading to lower monthly payments. Significantly, you will pay more interest over the whole period, so consider your options carefully and talk to an expert to ensure this is your best option. If not, they will help you find something that works for you.

Eliminate Your Mortgage Insurance

A Federal Housing Administration (FHA) loan is a favorable option that allows buyers to put down as little as 3.5% when buying a home. If you took the loan after the start of July 2013, you might be paying a mortgage insurance premium. If your deposit was less than 10%, you will need to pay the premium for the loan’s term, but you only need to pay for 11 years if you have a larger deposit.

To eliminate the insurance, you should refinance into a conventional loan. However, getting rid of the insurance payments depends on how much equity you have. If you have less than 20%, the mortgage insurance premium will be converted into private mortgage insurance. You do not have to pay this insurance if you have more than 20% equity.

If you have private mortgage insurance, you can ask your lender to remove it once you reach 20% home equity. Since the calculations depend on its value, they might require an appraisal before approval. However, you do not need to go through this process if you have reached that equity through regular repayments or have over 22% ownership.

Recast It

If you have the funds, you can recast your mortgage. This prepayment option allows you to make a lump-sum payment towards the remaining amount. Since you will have a lower balance, the lender will re-amortize the mortgage. With the loan term and interest rates remaining the same, your monthly payment should be much lower because you now have a smaller loan to repay.

USDA, VA, and FHA loans do not qualify for recasting, although the lender can still use this and other methods to modify your loan if they see you struggling with the payments.

They might also require a minimum amount before recasting, and that you have been keeping up with your payments.

You can reduce your mortgage payments in several ways, the most popular being refinancing. However, you can ask the lender for a modification or forbearance if you are facing financial hardship or to recast it if you want to pay a lump sum.

Shitanshu Kapadia
Shitanshu Kapadia
Hi, I am Shitanshu founder of moneyexcel.com. I am engaged in blogging & Digital Marketing for 10 years. The purpose of this blog is to share my experience, knowledge and help people in managing money. Please note that the views expressed on this Blog are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment , tax, financial advice or legal opinion. Please consult a qualified financial planner and do your own due diligence before making any investment decision.