Even though the housing market seems to be rebounding, we are still living in uncertain times and people are increasingly conscious of how much money they’re spending on necessities. If you’re like most people, you’ve managed to slim your grocery budget, reduced your heating costs and eliminated those subscriptions you barely use so you can finally save a little each month. Your mortgage payment is another place where you’re probably overspending without knowing it — the hundreds of dollars you could potentially save will help your budget stretch further or speed up the growth of that savings account.
You may be surprised by the many places where you can save money on your existing mortgage payment without having to refinance — from homeowners insurance to taxes and even mortgage insurance, even a small change makes a big difference in the long run. First time home buyers shouldn’t feel left out, though, I’ve got some neat tricks for getting into a home with the lowest payment possible for you, too. So, without further ado, here are my favorite tips for reducing your mortgage payment:
Consider an Exotic Mortgage
Buyers in today’s market are faced with a hard choice: they can buy less house today and get a fixed rate or maximize their buying power by using an exotic loan product like an adjustable rate mortgage (ARM) or interest-only loan and get as much house as they can while prices are still low. This is a tricky one, to be sure. Your payment will be significantly less with an ARM or interest-only product, but these loans carry a real risk of costing more in the long run than your fixed rate conventional loan. If you intend to refinance before the fixed rate period is up on an ARM or kick in principal payments on an interest-only loan, you’ll usually come out smelling like a rose.
For example, if you’re borrowing a $150,000 conventional fixed rate loan at 4.27 percent interest, your principal and interest payment alone would be $739.67 for the life of the loan. However, if you know you’ll be selling or refinancing in the next five years, a 5/1 ARM at 3.38 percent interest drops the monthly cost of borrowing that money to just $663.56. If you can find one, a 5/1 Interest Only loan at 3.75 percent will lower your cost to just $468.75 each month. Remember that an exotic mortgage is only a short-term solution — if you aren’t sure you’ll be able to refinance or sell before the rate flexes, you’re ultimately better off paying more each month and sticking with the fixed rate loan for the long haul.
Principal and Interest Payments on $150,000 Loan Amount with Different Products
|Fixed Conventional||5/1 ARM||5/1 Interest Only|
|P + I Payment||$739.67||$663.56||$468.75|
Look at All Your Loan Costs Before Committing
This one sounds simplistic, but it’s not unusual for buyers to get so caught up in the process that even the most basic steps can be easy to overlook. Ask your mortgage lender to provide you with documents for the different loan products that are available to you. Sure, the FHA may look good initially, but when you figure in the extra mortgage insurance you’re paying, it might not be such a great deal when compared to the Conventional mortgage. Then again, if you intend to roll your closing costs into the loan, the Conventional mortgage may have more fees that you’re going to have to finance.
If you haven’t settled on a lender, ask several loan officers to provide you with a run down of estimated costs and your estimated monthly payment for each. When you make your comparisons, don’t worry about the taxes or homeowner’s insurance since they’re going to be the same no matter which loan you choose, just focus on the principal, interest and any mortgage insurance.
Buy Down Your Rate
I know it sounds like a car dealer trying to sell you clear-coating when your mortgage lender talks to you about buying discount points, but this can be a really good way to reduce your payments if you have the extra cash to spare and will be in your home for a while. You can typically purchase one discount point for one percent of the cost of your mortgage, with most lenders limiting you to the purchase of three points. Each point will reduce your rate by 0.125 to 0.25 percent, for the life of your loan. That can mean some serious savings over the life of the loan and a modest reduction in your monthly payment.
When you were borrowing the same $150,000 at that 4.27 percent conventional rate, the monthly principal and interest payment was $739.67, but by buying just one point, you’ll reduce your rate to 4.02 percent and the payment to $717.85. More points mean bigger savings, as illustrated in the table below.
Payment Savings on $150,000 Fixed Rate Conventional Mortgage with Discount Points
|No Points||One Point||Two Points||Three Points|
|Buy Down Rate||4.27%||4.02%||3.77%||3.52%|
Make a Bigger Down Payment
It’s harder than ever to come up with money for a down payment, but this is one of the best ways to reduce your mortgage payment because it eats away at several fees simultaneously, especially if you have less than 20 percent of your home’s value to put down. Depending on the type of loan you’re taking out, the lifetime cost difference between borrowing 95 percent and 90 percent can be immense. On any newly-originated FHA loans, for example, if your down payment is less than 10 percent, you’re stuck with mortgage insurance for the life of the loan, no matter what.
Because of the long-lasting impact of mortgage insurance, higher down payments are good solutions for both the short and long term. As a short term solution, you’ll owe less principal, you’ll pay less interest and less monthly mortgage insurance, if applicable. Over the long term, you’ll be able to shake that mortgage insurance payment for good much faster, further reducing your total payment.
Pay All Your Mortgage Insurance Upfront
Your lender might not have told you this, but if you’re borrowing using a Conventional mortgage, you can pay all your mortgage insurance at closing instead of having to pay it monthly. The savings can be pretty substantial, too, especially if you plan to stay in your home a while. Instead of forking over an extra $55 each month to insure the $150,000 you borrowed, a one time fee of $2,550 covers you for life.
That $2,550 is the equivalent of 3 years 10 months of mortgage insurance payments — fewer if your mortgage insurance rate happens to be higher than average. Considering that your mortgage insurance won’t naturally fall off until at least six years into repayment with a 10 percent down payment, it’s a pretty substantial savings in the long run, too. If you paid each and every mortgage insurance payment on that same $150,000 loan, it would cost at least $4,015 during its natural life.
Reduce Your Homeowner’s Insurance Costs
If you have an escrow account, part of your payment each month goes to cover your homeowners insurance. This is pretty vital coverage, don’t get me wrong, but there are ways to make it cost a little less without noticing a significant difference in your quality of coverage. The easiest is to go out and get new quotes from different insurance companies — this is pretty straight-forward. Buy the policy with the best price and comparable coverage and drop your old one (but don’t forget to tell your lender, because they get really touchy if they think you’ve dropped your insurance completely).
If you like your insurance company and don’t want to switch to another provider, you can still shave off some costs by re-evaluating your coverages. Are you insuring items that are no longer in your home, like jewelry you’ve sold or gifted? Have you added a security system or other safety items that might reduce your home’s risk? When anything in your home changes, you should be informing your agent to keep your policy current. The same goes for your memberships in professional associations or clubs, you’d be surprised the discounts you get for just being a member of the National Association of Realtors, for example. Always ask about discounts — the worst thing anyone can tell you is no.
Adjusting your structure’s coverage is a little touchier, but is definitely something you need to address. If you can afford a higher deductible, raising yours will reduce your insurance premium. The same goes for what you insure — ask your agent if your structure and lot are both covered. The problem with lot coverage is that even if your house burned to the ground, your lot would still be there for you to sell or rebuild upon as you choose. There’s not much your insurance company is going to do for your lot, drop that coverage and you’ll save a few dollars.
Combining your other insurance policies under the same umbrella may earn you a multiple policy discount, but watch your auto rates if you do this. Sometimes the auto policies are expensive enough to negate any savings you’ll realize on your homeowners insurance.
Have Your Home Reassessed to Reduce Taxes
Property taxes figure big into your payment if your loan has an escrow, especially in urban areas where tax rates are much higher. Over the last decade, prices have risen to huge peaks and fallen pretty far, causing many homes to remain overvalued in the Tax Assessor’s files. This doesn’t mean you got a steal on your home, it means you’re getting ripped off when you pay your taxes.
Call your Assessor and find out what the procedure is for lowering your home’s tax assessment, especially if you bought before 2007. Most counties only need to see a current appraisal showing the new value of your home. Be aware that this strategy could backfire if you’ve made significant improvements or added-on since your purchase.
Make Bi-weekly Payments to Reduce Principal and Mortgage Insurance
When you need to reduce your payments right now, paying more doesn’t make any sense at all, but if you’re looking down the road for a way to shed some weight so you can go back to school or have a baby, reducing your principal is key. Instead of making your regular 12 monthly payments, consider switching to 26 bi-weekly payments — your lender can set this up for you so that you get a regular statement.
By reducing your principal as quickly as possible, you’re also reducing your mortgage insurance, which is based on your outstanding balance. It might not seem like much at first, but each extra payment will take a bite out of your principal, reducing your mortgage insurance — and as the effect snowballs, the mortgage insurance will soon disappear. Your mortgage gets paid off sooner too.
Pay Down Your Principal and Remove Mortgage Insurance
Tax returns, yearly bonuses or inheritances are great ways to reduce your mortgage payment. Although it won’t affect the payment itself (other than reducing your mortgage insurance payment, as described above), the smaller your loan to value (LTV), the sooner you can shake your mortgage insurance completely. It may take a couple of years of turning your tax refunds over to the mortgage company, but it’ll save you a big chunk each month to be free of mortgage insurance.
Be aware that this only really works with Conventional loans unless your lender will refinance your FHA into a Conventional loan product once you’ve reached 80 percent LTV. On a Conventional loan, you can drop your mortgage insurance when you reach 80 percent LTV — FHA loans aren’t so cut and dry, many require at least 11 years of mortgage insurance premiums regardless of the remaining principal.
Remodel and Increase LTV to Remove Mortgage Insurance
Another way to get rid of your costly mortgage insurance is to do some heavy remodeling, enough to push your home’s value up and your LTV to 80 percent or below. Certain types of remodels are worth more than others, but normally anything that increases interior space, adds bathrooms or upgrades bathrooms and kitchens is a pretty good bet. You might want to call your Realtor to see what sort of home improvements help the most in your area.
I cannot stress this enough — do not make improvements solely for the purpose of improving your home’s value unless it has some kind of functional defect — you’re never guaranteed to get a dollar for dollar return on your work, and in most cases you’ll spend more than you’ll gain in value. If you were always planning on putting in a second bath or updating the incredibly outdated kitchen, though, by making these changes early in your ownership, you’ll save yourself bundles in mortgage insurance premiums.
Have Your Mortgage Recast
When you’ve paid your mortgage faithfully, even adding extra payments in order to pay your loan off sooner, and something goes terribly wrong in your life, it may be time to ask the bank to recast your loan. This isn’t an option they’re likely to offer you voluntarily, but if you desperately need a lower payment it may be your best bet.
A recast is a simple concept, it takes your loan and stretches it back out — if you’ve been paying your 30 year mortgage at a rate that would pay it off in 15 years, you know you’ve already knocked a lot of time off your loan’s life. What the loan recast would do for you is effectively stretch the money you still owe back out over 30 years, reducing your monthly payment significantly but increasing your number of payments back to 360.
Provided your bank will do a recast with few fees involved, this little-used option can save your home from foreclosure if you’re facing a layoff or major expense. And although you’re back at the beginning in a way, you can still make extra payments when you have them to knock your mortgage out early.
Home Affordable Modification Program (HAMP) and Other Federal Loan Modification Programs
If you need to reduce your mortgage payment because you’re having a serious financial hardship, there are several federal loan modification programs available, depending on your situation. Many of these programs are available through your lender to reduce your principal or payments as a long-term option. You will have to meet certain eligibility requirements, which vary from program to program. When you’ve exhausted your other options and reduced your payment as much as you can on your own, you’ll stand a much better chance of having an application for loan modification approved.
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