Lenders generally check to make sure your mortgage is affordable when you first buy your home. Sometimes our circumstances change, however, and what used to be affordable may no longer be the case. That can add a lot of unnecessary financial stress as you worry about ways to make ends meet or even how to stop foreclosure.
Luckily, it doesn’t have to be that way. You have more power than you may realize to change your housing costs. We’ll explore your options for how to lower your mortgage payment and keep your home at the same time.
Understanding your current mortgage
Your mortgage servicer splits each of your mortgage payments into four separate categories, all of which contribute to the total payment amount. If you understand each of these four categories, you can figure out ways to tweak them individually. You can adjust them up or down, depending on your goals:
- Principal: The amount that actually goes toward paying down your mortgage balance.
- Interest: The amount that your lender charges, as dictated by your loan’s interest rate.
- Taxes: Property taxes that go to your local fire department, school district, etc.
- Insurance: Homeowners insurance that your lender requires. If you took out certain types of loans or put less than 20% down on your home, you may also pay for mortgage insurance.
Property taxes and homeowners insurance are generally charged on an annual basis. Your principal and interest payments, however, change over time depending on how far along you are in paying off your mortgage. Interest makes up the majority of your payments as you begin repaying the debt, while more of your payment goes towards paying down the principal as you near the end of repayment.
Most mortgages are also fixed-rate loans, meaning that your interest rate stays the same over time. If you have a variable-rate loan, your interest rate — and therefore your monthly payment amount — will change over time; sometimes it’ll be more affordable, and sometimes less.
How to lower your mortgage payment without refinancing
Luckily, there are still plenty of options available, and some may even help you save additional money in the long run.
Recast your mortgage
This process requires you to make a single lump-sum payment toward your mortgage (typically $10,000 or more) so that your principal balance is reduced. Your lender can then re-calculate your amortization schedule for a small fee, usually around $250.
Mortgage recasting is a much simpler process that keeps your current loan in place and simply lowers your monthly payment amount due to your lower principal balance. Most conventional loan lenders allow you to recast your mortgage, although it’s unavailable for government-backed mortgages such as FHA loans, VA loans, or USDA loans.
Cancel your mortgage insurance
Most conventional home loan lenders add an extra private mortgage insurance (PMI) charge to your monthly payment if you put down less than 20% for your home. Your lender is required to remove this charge automatically when your loan-to-value ratio reaches 22%, but you can actually contact your lender to request they remove the charge when you reach 20% equity in your home. Home values have been rising, and you may reach this amount sooner than you think.
Lower your homeowners insurance or property taxes
It’s always a good idea to shop around for insurance in case you can find cheaper premiums with another company. That can be tough to remember since homeowners insurance is somewhat obscured by your lender’s escrow process, but you have the right to find a cheaper homeowners insurance policy at any time.
You may also be able to lower your tax bill. Check with your local county for your home’s assessed value, which it uses to base your total tax bill on. If you think it’s higher than it should be, and you can back it up with data from comparable homes, you may be able to file an appeal to have your home’s value lowered. You may also be able to qualify for an exemption to reduce your tax bill, which many counties offer for low-income homeowners, senior citizens, etc.
If you’re able to lower your homeowners insurance or your tax bill, your mortgage servicer won’t need to collect as much into your escrow account to pay these each year. Thus, your monthly mortgage payment will be correspondingly reduced.
Consider a bi-weekly mortgage payment plan
Most lenders allow you to opt in to a bi-weekly mortgage payment schedule instead of making one large mortgage payment each month. Your monthly mortgage payment would then be cut in half. This takes the sting out of writing such a large check and can smooth out your cash flow between paydays, but it also has another added money-saving benefit as well.
When you make bi-weekly mortgage payments, you’ll make 26 payments in a year — enough for 13 full monthly payments, but within a 12-month span. This is akin to making one extra monthly payment on your mortgage each year that you may not even notice, which helps you pay your balance down even faster. Over time, this can even help you pay off your mortgage several years ahead of schedule.
Ask your lender for a loan modification
If you’re struggling to make your monthly mortgage payments or are already behind, check with your lender to see if they offer any debt relief options. Each lender offers its own loan modification program, which could include options such as temporary forbearance or permanently reducing your monthly payment by extending your loan term length or lowering your interest rate.
Your lender isn’t under any obligation to offer loan modification, and these options are typically limited to people undergoing financial hardship. You may need to write a letter to your lender and include documents to back you up, such as recent tax returns, a written budget, bank statements, etc.