For many families, money is tight right now. Tighter than it has been in quite a while. Some families have one or more members out of work. Some are single-income households facing quite a bit of uncertainty in the days ahead. Whatever your struggle, for most households, the single largest monthly expense is the mortgage.
Your home is an investment in your family, your financial stability, and your safety from the ravages of the world. When financial times get tough, it may feel somewhat like an albatross, weighing the family budget down and generating more than a little uncertainty of its own.
It doesn’t have to be that way. In fact, there are four things you can do that will reduce your monthly mortgage payments, freeing up space in your budget to handle other essential expenses and offer you some financial breathing room. The better you understand your options, the wiser decision you can make regarding which of these four options is the right one for you and your family.
1. Refinance Your Mortgage for a Lower Interest Rate
The interest rate of your mortgage is one of the factors that have a huge impact on how much you must pay each month for your home. Most monthly mortgage payments consist of a few key factors:
- Private mortgage insurance (necessary for mortgages in which buyers pay less than 20 percent of the purchase price as a down payment)
- Escrow (this is usually a combination of property taxes and your homeowner’s insurance)
The interest rate plays a huge role in how much you pay each month. Depending on when you purchased your home, the current interest rates could be substantially lower, especially if you’ve safeguarded your credit or, perhaps even improved your credit score in the interim. This means you could wildly alter your monthly mortgage payments by refinancing for a lower interest rate.
You can save hundreds each month on your mortgage by refinancing for a lower interest rate alone. There are other ways you can reduce the monthly mortgage costs further while refinancing your home.
For instance, you could extend the term back to a full 360 months. This isn’t always the most favorable route to take, though, as it means you will pay considerably more, over the life of the loan, in interest. On the other hand, if you need breathing room in your budget right now, it can be a solution you can seek to reduce by making catchup payments later.
If you’ve been paying for your home for 10 years, for instance, you have a certain amount of equity in your home. If you’ve reached the magic 20 percent equity point you can eliminate your monthly private mortgage insurance payment at the same time, allowing you to save even more money each month.
When so many families are struggling each month to make ends meet, shaving as little as $200-300 from the monthly mortgage can make a huge difference in the family budget.
Is it possible?
Cutting a single percentage point in interest on a $160,000 mortgage can save approximately $100 per month in the mortgage cost alone. The higher the mortgage, the larger the savings. But that is not where it ends. If you can reduce the interest rate by more than one point, the savings add up faster.
If your goal is exclusively about reducing your monthly outflow, though, you can really ramp up your monthly savings by extending the duration of the loan.
There are risks involved though – risks some homeowners aren’t willing to take unless absolutely necessary. First, it takes you back to the starting line and eliminates the progress you’ve made along the way.
Second, it makes you more vulnerable to future hardships. Interest rates are currently at all-time lows with some near zero percent. Odds are good that this will never again be an option if you take advantage of it now. If other financial hardships arise, you’ll be left with less wiggle room for overcoming them.
On the other hand, the world is experiencing what many consider a once-in-a-lifetime economic crisis. The odds of something like this occurring in the future are slim. Though other hardships may arise, there may be other options available when they do, such as “side gigs,” home equity loans, and other possibilities.
2. Refinance for Longer Mortgage Terms
In addition to the items mentioned above that affect monthly mortgage rates, the duration of the mortgage is another major factor that determines how much your mortgage will cost each month. Some people already have shockingly low-interest rates on their mortgages as a testament to their good credit. However, there are times in life when the greater need is for cash flow today.
Even at low-interest rates, the monthly mortgage bill can be stifling for many. If you’ve lived in your home a few years, 10 for instance, you can save a great deal of money each month by extending the mortgage terms back to the original 30. However, you can save even more money by working with lenders willing to extend the terms an additional 10 years.
This is rarely a recommended course of action but can free up critical funds for families facing extraordinary medical expenses, as well as those who are simply worried about riding out a current financial crisis. Whether you are dealing with a temporary unemployment issue and need to stretch funds for an unknown amount of time or you have more immediate and specific financial goals in mind, extending the duration of your mortgage terms can provide a surprising amount of breathing room in your monthly budget.
Again, this is a process that may impact future options for financial “air” but that does offer immediate benefits that may be sufficient to see you through current financial or cash flow issues to set the stage for future growth and stability.
While there are times when you have to bite the bullet and go the less appealing financial route, refinancing your mortgage for a longer-term alone is usually a last resort option for those who are interested in paying as little for their home as possible, or for those who want their homes to be a sound investment in the future of the family. It is an option, but not always the best option available to you. It may be worth your time and energy to explore other options before considering this one.
3. Apply for a Loan Modification Loan
This option is usually only available to those who have fallen upon verifiable hard times and who are already behind on their mortgage payments. In other words, this is a “last resort” option for people who are often at risk of losing their homes.
Unlike refinance loans for your mortgage, a loan modification doesn’t require good credit to secure. What it does require is that homeowners supply documentation supporting their hardship claims. The following documentation is essential for securing a modification loan.
- Income statements explaining how much you earn and where that money comes from.
- Expense statements. Lenders need to know your current monthly expenses. They’re going to seek a breakdown of those expenses, so they know how much goes to housing, food, transportation, and other essential expenses.
- Financial documents. They want a “big picture” view of your overall financial situation that includes bank statements, tax returns (and/or IRS Form 4506-T), employer pay stubs, and loan statements.
- Statement of hardship. This is a letter from you that explains the cause of your current hardship as well as actions you’re taking to solve the problem. You should also attach any documentation you have to support your claims (such as medical bills and statements for lost work due to illness or injury, return to work statements if you were laid off, etc.).
Some lenders require you to be up to 60 days delinquent on your mortgage. While these were once common through government programs, many of those have since expired. In light of the current COVID-19 crisis, there may be a time in the near future where the following home loan modification programs, or some similar to them, will come back:
- Home Affordable Mortgage Program (HAMP)
- Home Affordable Refinance Program (HARP)
- Enhanced Relief Refinance Program (available through Freddie Mac)
Borrowers today may consider Fannie Mae’s Flex Modification program to help you find relief during hard times. Unlike other modification programs that require you to be in dire straits before applying, the Flex Modification program encourages you to apply for relief sooner rather than later when hardships arise. Benefits of Flex Modification include:
- Mortgage payment reductions up to 20 percent (thanks to adjustments to interest rates, terms, and a potential forbearance for a portion of the unpaid principal).
- No requirements to pay past due amount up front (folds it into the unpaid balance of the loan).
- Brings your mortgage current.
- Helps homeowners avoid foreclosure.
The biggest benefit of the Flex Modification program is that it makes mortgage payments affordable for a sustainable amount of time.
4. Get Rid of Your Private Mortgage Insurance
Private mortgage insurance (PMI) is one of the expenses of buying a home that most homeowners try to ignore month after month. Some consider it an invisible expense that is wrapped into the total mortgage cost. However, at a rate of between 0.5 and one percent of the entire loan amount each year, the monthly costs can add up quickly. Especially if you’re a homeowner who has a larger than average loan.
Even for average home loans, it can easily add up to $200 or more per month. That’s money that buys insurance for the bank in case you default on your mortgage. It does nothing for you, except make it possible to get a mortgage with less than 20 percent for a down payment.
How do you get rid of your PMI?
That challenge is a little easier said than done. Essentially, prevention is the best cure. If you pay 20 percent down when purchasing your home, you never have to pay it. Since most homebuyers do not have that kind of cash begging to be spent, the next option is to reach the point where you have 20 percent equity in your home as quickly as possible.
However, even then, there’s a catch. Once you pay your mortgage balance down to 80 percent of the appraised value you can request (in writing) that your lender eliminates the PMI payments. Your lender may require you to do the following in addition to requesting to remove the PMI in writing, according to Fox Business, including:
- Maintain a good payment history.
- Be current on your mortgage payment.
- Obtain a new appraisal to prove your loan balance isn’t greater than 80 percent of your home’s value.
- Show proof there are no other liens on your home.
Depending on how large those monthly payments are, and your current financial need, this might be an excellent option for reducing your current mortgage payments.
Different people have different needs and concerns when it comes to reducing their monthly expenses. With mortgage payments occupying such a large amount of financial bandwidth for the average family, it makes sense that any one of these steps could have a huge impact on your ability to make your financial ends meet.