Several years ago, in 2017, the Bureau of the Census (the federal agency that biennially administers the AHS – the American Housing Survey) analyzed what percentage of homeowners held titles to their homes/properties that were free and clear – with no encumbrances, mortgages or liens.
The housing data analyzed by AHS included more than 115,000 units. The data’s conclusions suggested about 40% of households operate without mortgage debt.
This estimate from the Census Bureau falls in line with Zillow’s conclusions pulled from data collected from more than 3 million responses, around the same time. Zillow’s data similarly estimated that 37% of homeowners owned properties that were free and clear.
With about 140 million housing units in the United States – 60% of these are mortgaged, there is tremendous potential for homeowners (and real estate investors) to save oodles of money from perhaps one of the most confounding economic moments in recent U.S. history.
Potential savings opportunities abound because financial indicators point to beneficial opportunities like these –
- Mortgage rates continue to remain at historic lows. Mortgage rates have hit historic lows four times in 2020 (since records have been kept beginning in 1971). According to Freddie Mac, on June 18, 2020, the average mortgage rate in the United States was 3.18%. For those interested in 15-year mortgages, the average for this same period was 2.58%.
- The financial markets have begun to loosen some of the more stringent guidelines enacted in response to the housing market’s nosedive around 2008-2009.
How to Lower Your Monthly Mortgage Payment
For many families, the monthly mortgage payment often accounts for a significant portion of the household’s total monthly income. Most monthly mortgage payments include several components (the components create the acronym, PITI) as follows –
- P – Principal, this is the portion of the payment that reduces the outstanding balance of the existing mortgage.
- I – Interest, this is the portion of the monthly mortgage payment that remits payment to the bank for the cost of the use of the money during that preceding month – this is known as interest earned.
- T – Taxes, this is the portion of the monthly mortgage payment that is equal to a pro-rated monthly tax payment. This is collected by the bank and held in escrow, so a lender has enough funds to pay the taxes when due.
- I – Insurance, this is a portion of the monthly mortgage payment that is equal to a pro-rated monthly payment directly related to the homeowner’s insurance premium that protects both the bank’s and the homeowner’s investment.
Note that monthly mortgage payments may include the premium due each month if a borrower was required to pay PMI (Private Mortgage Insurance). PMI is required when a borrower’s down payment is less than 20% of the purchase price.
A monthly mortgage payment is comprised of a combination of several payments that are ultimately applied for different purposes. The reality is a mortgage payment can be reduced by modifying any one of the components noted above – Principal, Interest, Taxes (Real Estate), Insurance (Homeowners &/or PMI).
Reduce Your Monthly Mortgage Payment by Taking Advantage of the Low Rate Environment
As noted above, the interest rate environment from the end of 2019, through mid-year 2020 is one for the record books. Many borrowers have already refinanced their mortgages (some more than once!) to realize the financial advantages generated by lowering one’s interest rate – as mortgage rates have been free-falling for some time.
But, does that mean that those borrowers who have already spent the time and money to refinance in this falling rate environment are out of luck because it would not make fiscal sense to further reduce the rate again because of the costs to refinance?
Like all financial decisions, the answer depends on the borrower’s situation, plus the borrower’s risk tolerance/aversion, in light of some of the costs/risks associated with this, or any financial decision. The reality is lowering one’s monthly mortgage payment – even with reasonable closing costs – is beneficial if:
- The borrower intends to remain in the property long enough to recoup the costs to close, plus generate some savings, which, of course, was the primary purpose of refinancing in the first place.
- The mortgage is being refinanced for several purposes – other than lowering the interest rate. Other refinancing purposes are discussed in detail further in the narrative.
As a general rule, most borrowers are advised that it makes fiscal sense to refinance their current mortgage if the new mortgage’s interest rate is at least two percentage points below the current rate. However, the decision to refinance to lower a mortgage interest rate is a bit more complicated than this oversimplified rule.
As such, borrowers who wish to take advantage of the historic rates currently available are advised to contact a mortgage consultant who can do the math to help make the decision.
Refinance/Recast the Current Mortgage to Extend the Mortgage/Loan Term
One of the simplest methods to lower one’s monthly mortgage payment is to extend the amount of time allowed to repay the outstanding mortgage debt. Some lenders refer to this process as recasting, while others recognize the act as the re-amortization of an existing mortgage loan.
Many lenders have set forth procedures that allow current borrowers to modify the term of the mortgage for, of course, a fee. But, note, lending institutions are under no obligation to offer this term extension, and they have complete freedom in setting the terms and expenses of the process – that is, if the lender even decides to allow recasting.
From a purely mathematical perspective, recasting a 15-year mortgage to a 30-year mortgage will dramatically reduce the monthly payment. This option to reduce a mortgage payment is stark, but never forget that when you decide to extend a mortgage term from 15 to 30 years, you have, perhaps without proper acknowledgment, agreed to pay more than twice the interest on the same amount of money you owe. [The reason the interest is more than doubled (despite the fact the term was only doubled) reflects the concept of compounding, which is beyond the scope of this narrative.]
Here is a quick example of how an extended-term benefits borrowers in the short-term but costs more over the long haul –
|Loan Amount||Interest Rate||Mortgage Term||Monthly Payment||Total Mortgage Payments|
While a borrower would save $263 each month $740 – $477.42) by doubling the life of the loan, the total interest paid for this 30-year mortgage would increase by $38,726.
Eliminate Private Mortgage Insurance
Private Mortgage Insurance (PMI) is required by mortgage lenders when borrowers buy a home with a down payment that is less than 20% of the purchase price. The insurance premiums a borrower pays (which includes an upfront fee and monthly premium payment) are paid to protect the bank’s investment (the mortgage money lent).
These premiums paid by the borrower offer no benefit to a borrower – unless one considers the fact that a lender will not approve a mortgage with a loan-to-value (LTV) above 80%, without the mortgage being conditioned on the approval and payment of Private Mortgage Insurance.
The good news about PMI is that borrowers who are currently required to pay this insurance as a condition of their mortgage can challenge its validity (its necessity) based on two primary factors –
- The property value may have appreciated since the mortgage origination date, to the point where PMI is no longer required. Example – you purchased a home ten years ago for $200,000, with a down payment of 15% or $30,000. Similar homes have recently sold for $300,000+; therefore, the original mortgage amount of $170,000 – even if the balance has barely been reduced – would have a current LTV of $170,000/$300,000 = 57%. This current LTV reflects a more appealing equity position for the borrower/bank, which requires the PMI company to eliminate the insurance.
- The original mortgage balance has been reduced significantly, and would likely generate an LTV below 80%, the demarcation level where PMI insurance begins to a mandatory underwriting condition.
- A combination of a decreased mortgage balance and an appreciated property value.
Most lenders require those borrowers challenging the validity of PMI insurance to obtain a professional appraisal by a neutral, third-party, license/certified appraisal professional. This opinion of value is used to determine the validity and, ultimately, if the continuation of PMI premium payments is warranted per the program’s guidelines.
Request a Re-assessment of the Home’s Taxable Value
As noted above, most monthly mortgage payments include a monthly pro-rated portion earmarked for the property’s real estate expenses when they come due. Each property is assessed by the locality’s/county’s taxing authority to determine a value that calculates the taxes due – money that funds local public services, etc.
It is important to differentiate between the process of appraising and the process of assessing. For most homeowners, very often, there is a difference between their home’s assessed value and their home’s appraised value.
A tax assessed value is used to calculate the amount of taxes that are due on a given property when applied to the locality’s mill rate – which is equivalent to 1/1000 of one dollar. The real estate taxes are a significant source of operating funds for all levels of government.
Your home’s current tax assessment may have been mistakenly over-assessed because erroneous assessments happen more often than one would expect. And, even if there were no mathematical or over-assessment errors, it is still possible to challenge the taxing authority’s assessor inaccurate/invalid perspective of the property’s utility/value.
Most taxing authorities have established procedures should a homeowner request to be heard by the state’s board of equalization or equivalent government agency. If a homeowner’s challenge is approved, the assessed value will decrease. Ultimately, this action will reduce the home’s real estate taxes and the borrower’s monthly prorated tax payment amount.
Choose a More Attractive/Functional Mortgage Product
Consider a Graduated Payment Mortgage (GPM) or Similar Mortgage Product
If lowering your mortgage payment may only be needed temporarily (for example, when a spouse returns to graduate school), it may benefit a homeowner to refinance to a mortgage product that offers a Graduated Payment Mortgage (GPM) option. Graduated Payment Mortgages (GPMs) are considered somewhat of a relic in the world of finance, but offer certain borrowers an important benefit when conditions are appropriate.
Interest-Only Mortgage Product or Temporary Forbearance
Mortgage payments, especially at the beginning of a mortgage term, are interest-heavy.
Here’s an example – the principal and interest payment for a $100,000 mortgage @ 4% (as noted in the example above) was $477.42 each month. How much of this first payment would you guess would be applied towards the principal of the outstanding mortgage balance?
The answer is the first mortgage payment of $477.42 would have include a principle payment of $144.09, because the interest due on $100,000 @4% is $4,000 per year or $333.33 per month. ($100,000 * 4% = $4,000/12 = $333.33)
$477.08 – $333.33 = $144.09
$144.09 will be used to reduce the mortgage balance to approximately $99,856.
Some lenders offer interest/only payment options for borrowers who are struggling to maintain timely payments. Lenders generally prefer this type of arrangement with faltering mortgagors because the lender’s investment continues to generate the expected return – the interest payments by borrowers, despite the borrower’s financial difficulties.
A Word of Caution – reducing one’s monthly mortgage payment by choosing to pay only interest is a great stop-gap measure – and a legitimate way to reduce expenses when facing a time-crunch or unexpected life event. However, paying an interest-only mortgage can never be a long-term solution.
An interest-only mortgage is like a treadmill. While you might get some exercise while walking/running in place, you will never progress towards a goal – which in this case is a mortgage burning party!
Set up a Bi-Weekly Mortgage Plan
Although there are companies that charge for this service, any borrower can choose to pay their lender a half-payment every two weeks instead of one payment monthly. And while this may not lower the actual monthly mortgage payment, setting up this type of payment schedule may help those budgeters who prefer to make a payment (when paid bi-weekly) before they give in to temptation and spend the money elsewhere.
Ironically, if you choose to make a half-payment every two weeks, you will actually be making 13 payments each year – which will accelerate the reduction of the balance of your mortgage balance, – which ultimately truncates a significant portion of the time you are required to pay your mortgage in full.
Lowering one’s monthly mortgage payment can be likened to receiving a small raise, as a homeowner’s disposable income increases when a mortgage payment is reduced.
If the opportunity presents itself, homeowners and real estate investors would be imprudent to let the opportunity pass them by without at least determining if there would be financial benefits as the economy negotiates these uncharted pandemic waters.
One thing is for certain; historic rates will not last indefinitely.
As they say, carpe diem!