Many people are facing troubling economic times or moments of hardship. Whether facing recent unemployment, taking time off from work to care for family, or encountering one of the countless other moments of hardships families across the country face at any given moment in time, the idea of lowering your mortgage payments to help assist with the family budget during these trying times may sound appealing.
What you may not realize, though, is that there are many options available to you that can help you do exactly that. This means you can explore these options to determine which offers you the best potential solution to your current financial woes.
For instance, some people only need to temporarily reduce their mortgage payments. They need assistance just long enough to get through this current crisis while expecting their financial circumstances to bounce back within a matter of months or as long as one year.
The solutions that work best for you may be different than what works best for someone who has decided to transition to a stay-at-home parent after the birth or adoption of a child and needs longer-term relief.
Below we discuss different options that are available to help you lower your mortgage payments and the situations in which they present the best option according to your circumstances and needs – as well as when certain options might not be the best choice for you to make.
Lowering Your Mortgage Payments Before Your Initial Mortgage
The steps you take to reduce your mortgage payments before your mortgage are often the most impactful. By taking the right steps before you take out your mortgage loan you can get better terms for your mortgage leading to lower interest rates, which can save you thousands if not tens or even hundreds of thousands on the total amount you pay for your home.
When it comes to monthly mortgage payments, these actions can help you save hundreds each month on your mortgage payments.
- Improve your credit score. Improving your credit score is the single most important thing you can do to reduce your monthly payments before you take out your initial mortgage loan. Prime rate mortgages offer the best terms to borrowers. Sub-prime loans can change your monthly mortgage payments by hundreds of dollars per month, according to Forbes. Even a $150 swing in monthly mortgage payments over 360 months is substantial, requiring you to pay an additional $54,000 for your home.
- Make a larger down payment. The more you pay for your down payment, the greater risk you are taking toward homeownership. Lenders like to see this and will often reward you with lower interest rates. Additionally, if you make a down payment of at least 20 percent, you can eliminate private mortgage insurance (PMI) saving you quite a bit of money on your monthly mortgage payments.
- Consider a piggyback loan to boost your down payment. Even if you do not have the cash for a 20 percent down payment at first, paying 10 percent of the down payment on your own and getting a piggyback loan for the additional 10 percent, still allows you to eliminate the PMI payments and results in substantially lower monthly mortgage payments.
- Pay your PMI upfront. With this option, you pay the entire sum of your PMI payments at the time of closing. It offers the benefit of not having to include them in your monthly mortgage payments and eliminates the need to request these payments be discontinued once you’ve satisfied the terms and your loan-to-value ratios reach 78 percent.
- Start with an Interest-Only Mortgage. An interest-only mortgage is a short-term mortgage, usually with a term of either five, seven, or 10 years in which you only pay the interest payments on the loan before the loan converts to a standard scheduled loan in which you will pay principal and interest payments each month. This provides lower initial payments with a substantial increase after the initial end of the original term.
As you can see, there are quite a few options available to you when you want to minimize your monthly mortgage payments from the very beginning. Another option, that is available in some circumstances is to extend the length of your mortgage loan to 40 years rather than 30. This is not advisable in most situations as it will negatively impact the amount you’ll pay for your home and may also cause lenders to assign higher interest rates to your loan.
Lowering Your Monthly Mortgage Payments Short Term
Not everyone needs to make permanent adjustments to their mortgages. They simply need help for a little while until they can get back on their feet. Whether that means returning to former jobs, getting new jobs, or developing additional income from a second job or a spouse returning to work, doesn’t matter, as long as the need is temporary, there are a couple of options to consider.
- Mortgage Forbearance. When you apply for loan forbearance, you’re asking your lender to temporarily reduce your monthly mortgage papers as you address financial hardship. Some lenders may suspend payments during this time altogether, others may offer interest-only payments with regular payments to be added to the end of your original loan period, and some may offer a general reduction. You will have to make up the missed payments eventually, but it can buy you temporary breathing room. One important thing to note if you’re considering this option is that you must contact your lender before missing a payment rather than after.
- Loan Modification. If your financial hardship is a little more serious or has lasted longer than your savings, you may apply for a loan modification. In this instance, the changes are long-term as your lender will restructure your mortgage so that you can manage your monthly payments. Once again, it is always better to request assistance the moment you see trouble on the horizon and well before you miss your first payment.
Many factors can position homeowners in need of one of these solutions to reduce your monthly mortgage payments. Financial hardships come in many forms. From prolonged illnesses, costly medical treatments, divorce, job loss, and all points in between. Everyone needs a little help sometimes and these types of modifications and forbearances can help you ease some of your burdens.
Long-Term Solutions to Reduce Your Monthly Mortgage Payments
Many people, however, are seeking long-term solutions to reduce monthly mortgage payments. The good news is that you have many options available to you. In fact, some of them can help you not only reduce your monthly payments but also help to reduce the total amount you will pay for your home in the right set of circumstances.
These are a few of the options you have available to you for lowering your monthly mortgage payments and putting a little extra cash in your pockets to help take care of family, manage financial difficulties, set aside savings, and countless other things.
- Refinance for a lower interest rate. Many things impact your interest rate. Currently, interest rates are hovering at record lows and expected to stay there for a while. This creates opportunities for those who may have older mortgages at higher interest rates. In fact, even reducing your interest rates by a single point can net significant savings. Imagine the difference with an even larger reduction! Plus, your credit score may be better now, after years of timely mortgage payments, positioning you to maximize your advantage when it comes to these lower rates. This plan works best if you are going to be in your home long enough to “recover” the losses associated with refinancing your mortgage (usually two years) and if you can reduce your interest rate by one point or more. Just take your time and make sure you’re getting the most value from your refinance experience.
- Extend the length of your loan. Once you’ve paid on your loan for a few years, you might need to knock your monthly payments down a bit to provide a little extra wiggle room in your budget. You can do this by extending the terms of your loan by five or ten years. In this situation your interest rate would remain the same, you would simply add more time to your loan in exchange for lower monthly mortgage payments. This can also be accomplished by a refinance loan that may reduce your interest rates as well. Otherwise, you will end up paying for more than originally projected to purchase your home.
- Recast your mortgage. Recasting your mortgage is an ideal scenario if you come into a larger sum of money after your initial mortgage, such as by selling your former home, lottery winning, or inheritance and invest that money as a lump sum payment into the principal you owe on your home and then recalculate future payments based on the remaining balance owed. This can net you significant reductions in monthly mortgage payments while reducing the interest you pay on your home as well. It’s a win on multiple fronts. You may even be able to reduce the loan term in the process.
- Ask for a reassessment of your property taxes. This is one thing that can help you reduce your monthly mortgage payments by reducing the amount of money you need to place in escrow each month. On the flip side, it can be a risky move if your home is not one of the many in the country that is currently overvalued when it comes to property taxes. This is one you need to be fairly certain will work in your favor though it can help reduce your monthly payments in the right situation.
- Consider renting rooms in your home. This works well for empty-nesters who have children away at college or living on their own and extra room in the home. By charging a tenant a set amount for using your spare space and applying the added income to your monthly mortgage payment you may find a lot of additional wiggle room in your budget. Of course, you’ll want to screen tenants carefully or consider only renting to trusted friends or those who have excellent references from people you know and trust.
As you can see, there are plenty of opportunities for you to lower your monthly mortgage payments. Just remember that some are better options than others when all is said and done. It’s important to do your homework and explore your options before committing to one method. Consider the pros and cons and then decide which one offers you the largest potential return on your investment with minimal loss.
You might also consider reaching out to your financial plan to see how these changes will affect your retirement income and your current bottom line. It’s never a bad idea to make weighty decisions like these armed with the facts.