How to Lower Your Mortgage: Actionable Steps
Gain control over your mortgage with clear steps to reduce monthly payments and overall loan expense.
A mortgage is a significant financial commitment. Effectively managing this debt can lead to considerable savings over the loan’s lifetime. Homeowners can use various strategies to lower monthly payments or reduce the total interest paid. Understanding these approaches helps individuals make informed decisions about their housing finances.
Refinancing Your Mortgage
Refinancing a mortgage replaces an existing home loan with a new one, typically to secure a more favorable interest rate or different loan terms. Before considering a refinance, evaluate current market interest rates to determine if a lower rate is attainable. Lenders review your credit score; a higher score generally qualifies you for better rates and terms. The loan-to-value (LTV) ratio, comparing the loan amount to the home’s appraised value, is also significant; a lower LTV (80% or less) often results in more favorable options. Be aware that extending the loan term through refinancing could increase the total interest paid, even with a lower interest rate.
Rate-and-term refinancing is common, aiming to reduce your interest rate or change the loan term. For government-backed loans (FHA or VA), streamline refinancing options may be available, often requiring less documentation and a faster process. To prepare for an application, gather financial documents like recent pay stubs, the last two years of tax returns, bank statements, and current mortgage statements.
The refinancing process begins by finding a suitable lender and comparing offers for competitive rates and terms. After selecting a lender, submit a formal application package with your financial documents. The lender will order an appraisal of your home to determine its current market value, crucial for calculating the LTV ratio. Following the appraisal, your application moves to underwriting, where the lender verifies your financial information and assesses creditworthiness. This phase can take several weeks as the lender evaluates your ability to repay the new loan.
Once underwriting is complete, the final step is closing. During closing, you will sign all necessary legal documents for the new loan, and associated closing costs will be paid. These costs typically range from 2% to 5% of the loan amount and include fees for origination, appraisal, title insurance, and legal services. The entire refinancing process, from application to closing, generally takes between 30 and 45 days.
Reducing Your Monthly Payment Through Other Avenues
Beyond a full refinance, other strategies can directly reduce your monthly mortgage payment. One method involves removing Private Mortgage Insurance (PMI), often required with less than a 20% down payment on a conventional loan. Homeowners can request PMI removal once their loan-to-value (LTV) ratio reaches 80%, meaning they have at least 20% equity. A good payment history is usually a prerequisite. Sometimes, a significant increase in property value can also contribute to reaching the necessary LTV for removal.
To initiate PMI removal, contact your loan servicer for their specific requirements. They will often require an updated appraisal to confirm the current market value and your equity position. Once the LTV threshold is met and all other conditions are satisfied, the servicer will cease charging the PMI premium, resulting in a lower monthly payment.
Appealing your property tax assessment can reduce monthly housing costs. Property taxes are assessed by local government entities based on your home’s estimated value. Common grounds for appealing include overvaluation compared to similar homes, or factual errors like incorrect square footage. To support an appeal, you will need evidence such as comparable sales data, photographs highlighting negative property conditions, or a professional appraisal report.
A property tax appeal involves researching your local assessor’s office for their specific process and deadlines. Then, file a formal appeal application, submitting all supporting evidence. In some jurisdictions, you may need to attend a hearing to present your case. While success rates vary, an appeal can result in a reduction of your assessed value, leading to a lower property tax bill and reduced overall monthly housing expense.
Accelerating Principal Reduction
Strategies focus on reducing total interest paid and shortening the loan term, even if the monthly payment does not immediately change. Making extra principal payments is a direct way to achieve this goal. Directing additional funds towards the principal balance reduces the amount of money on which interest accrues. This can be done by adding a fixed amount to your regular monthly payment, such as an extra $50 or $100, and explicitly designating it for principal. Alternatively, make one-time lump-sum payments whenever you have extra funds, such as from a bonus or tax refund.
Bi-weekly mortgage payments are another effective method. Instead of one full monthly payment, you make half your payment every two weeks. This results in 26 half-payments annually, equating to 13 full monthly payments instead of 12. This extra payment goes directly towards reducing your principal balance, significantly shortening the loan term and reducing total interest paid.
Mortgage recasting, or re-amortization, lowers your monthly payment after a large lump-sum principal payment. Lenders typically offer this option when a borrower significantly reduces the principal balance. Recasting recalculates monthly payments based on the new, lower principal balance, while keeping the original interest rate and remaining loan term intact. This results in a reduced monthly payment without a full refinance. To request recasting, contact your loan servicer to inquire about eligibility requirements and associated fees, which typically range from $250 to $500.