Most people pay on a mortgage for years, so thinking about reducing mortgage payments is pretty normal. If you’ve been having that thought, you’ll be glad to know that there are ways to reduce your mortgage payment and these tips will help you figure out if any of them could work for you.
Your mortgage payment consists of the principal and interest payment you pay to the lender. Most of the time, the lender also pays your property taxes, home insurance, and mortgage insurance if needed. So, the lender includes a monthly portion of those fees in your monthly payment.
Several factors determine the amount of your mortgage payment, including the following:
1. The price of the house you want to purchase
2. The amount of your down payment
3. The length of your mortgage, typically 15 or 30 years
4. The cost of mortgage insurance, if needed
5. The cost of your home insurance
6. The cost of the property taxes on the home
7. The interest rate
8. How risky the lender thinks it will be to offer you a loan
You can control some or all of those factors to either increase or decrease your monthly mortgage payments.
If you’re thinking about buying a new house and you’re wondering how you can get the lowest mortgage payment possible, these tips are for you.
Control Your DTI Ratio. Start by calculating your debt to income (DTI) ratio. Lenders might offer a loan to someone with a 43% ratio, but they really want a ratio of no more than 36%. To calculate your DTI ratio, divide your debts by your income. For example, let’s say you make $50,000 per year, which translates to about $4,166 per month. Assume that the total of your debts, including loan payments, credit card minimums, child support, alimony, and all other debts totals $1,000 per month.
Divide 1000 by 4166 and the answer is 24%. That sounds good, but assume that you used some mortgage calculators online and you know that the house you want will require a $1,000 per month payment. When you add that to the original $1,000, your DTI becomes 48%. You’re now too much of a risk for any lender to even offer you a mortgage.
To fix this situation, you could purchase a less expensive house, pay off some loans to lower your debt, or save a larger down payment so that you need to borrow less.
Control Your Credit Score. Let’s say that you’ve lowered your DTI ratio, but your credit score is low. Different loans have different requirements for your credit score. Those minimum requirements range from 500 to 740 or more.
While you could probably get a mortgage with a low credit score, you’ll find that you’ll pay a higher interest rate, and you’ll be required to have a larger down payment. Before you start house hunting, take a look at your credit score. If it’s lower than you’d like, there are steps you can take to increase your score before you apply for a mortgage or a pre-approval.
Mortgage loans have different minimums for a down payment. A conventional mortgage, like the one you’d get from a bank or credit union, doesn’t always require 20% down, but you pay a penalty if you put down less than that in the form of Private Mortgage Insurance (PMI). That PMI amount is added to your monthly mortgage payment until your outstanding balance equals 78% of the sales price of your home when you purchased it.
You’ll also pay for mortgage insurance for some government-backed loans. For example, FHA loans require insurance if you put less than 20% down, and you can cancel it when your loan balance reaches 78% of the purchase price of the home.
On the other hand, a USDA loan, which has low interest rates and down payment requirements, requires mortgage insurance that lasts for the life of the loan. If you’re considering a USDA loan, do the math to make sure that the benefits of a low down payment and interest rates outweigh the cost of the mortgage insurance.
A fixed-rate mortgage has one interest rate for the life of the loan. An adjustable-rate mortgage typically has a lower interest rate at the start of the loan, and the rate adjusts over time. For example, a 5/1 ARM has a fixed rate for five years, and a variable rate that adjusts every year after the first five. Adjustable-rate mortgages typically have a lower starting interest rate than a fixed-rate mortgage, which would make your mortgage payment lower.
If you consider an ARM, keep in mind that if interest rates rise significantly, you could end up with a payment that is higher than if you had gotten a fixed-rate mortgage. If you don’t plan to live in your home past the fixed-rate portion of the mortgage, you’ll get the benefit of the lower interest rate. But, keep in mind that plans change.
You can still work on reducing mortgage payments if you already have a mortgage.
Refinancing your home means that you change the interest rate, payment schedule, or terms of your existing mortgage. You can refinance with your current lender or find another lender. You can consider refinancing if it will benefit you because:
· Interest rates have fallen significantly
· You can refinance an ARM
· Your credit score has improved and would warrant a lower interest rate
· You have a 15-year loan and you want to move to a 30-year loan to lower payments
Keep in mind that refinancing typically requires additional closing costs. If paying those closing costs would outweigh the benefits of refinancing, refinancing isn’t a good option.
If you’re having a hard time making your mortgage payments, or have fallen behind, you may be able to take advantage of mortgage modification programs. You’d need to find out if your lender participates in any loan modification programs. If they do, you may be able to restructure your loan to lower your monthly payment. If you are “underwater” with your loan, meaning that you owe more than the home is worth, a modification program may still let you refinance.
It is possible that your county’s tax assessor has overvalued your home. If you think that is the case with your home, you can contact the assessor’s office and request a second evaluation. If you still think the assessment is too high, you can request a hearing.
Lowering your home insurance won’t contribute a lot toward reducing your mortgage payments. But, if you’ve been with one insurance company for a long time, it is possible that another company would give you a lower rate. It’s always a good idea to get quotes for home insurance every year just to determine if you can get a lower rate for the same level of coverage.
If you needed mortgage insurance when you bought your home, your lender will automatically remove it when your loan balance is 78% of the sales price of your home when you purchased it. However, if you have a good payment record with your lender, you may be able to remove the insurance at 80%.
The real estate process, whether you’re just buying a home or seeking tips for reducing mortgage payments, can be complicated no matter where you’re located. When you work with LemonBrew, you’ll have the advisors you need every step of the way. From finding the perfect real estate agent, to navigating the title search process, to finding the best mortgage, we’re there for you, so contact us today.