How to Lower Monthly Mortgage Payments

Lowering Your Monthly Mortgage Payment When You Buy

If you're looking to nab a lower monthly mortgage payment when buying a home, focus on the ways you can decrease how much you borrow, how much interest you'll pay or the amount you're charged for the other expenses that make up your monthly mortgage payments.

• Improve your credit. While you can qualify for some types of mortgages with a credit score in the high 500s to mid 600s, a higher score can help you get a lower interest rate. If you don't need to buy a home right away, improving your credit first could be a wise idea.
• Save for a bigger down payment. The larger your down payment, the less money you'll have to borrow and repay. A larger down payment can also help you qualify for a lower interest rate. And, if you put 20% or more down, you can avoid paying for private mortgage insurance (PMI) with a conventional loan, which further reduces your monthly mortgage payment.
• Look for no or lender-paid PMI options. Even if you can't afford a 20% down payment, there are mortgage options without mortgage insurance. A VA loan through the Department of Veterans Affairs could work, if you qualify. Private mortgage lenders may also offer mortgages with a low down payment and charge a higher interest rate rather than requiring you pay for PMI. These lender-paid options can lower your monthly mortgage payment, but consider the long-term cost and whether it's a worthy tradeoff.
• Get a piggyback loan. Another way to avoid PMI without putting 20% down is to get a piggyback second mortgage. A common arrangement is a 80-10-10 loan, where you borrow 80% with your primary mortgage, borrow 10% with your second mortgage and put 10% down. You'll need to repay both mortgages, but sometimes it can be cheaper than a single mortgage with PMI.
• Choose an adjustable-rate loan. An adjustable-rate mortgage (ARM) has an initial period (often lasting one, three, five, seven or 10 years) with a fixed interest rate. After the initial period, the rate can be regularly adjusted (once a year is common) until it's paid off. ARMs often start with a lower rate and monthly payment than fixed-rate mortgages, but you're taking on the risk of having a higher interest rate and corresponding monthly payment later. If you're planning to sell your house within a few years, this could be a good solution—less so if you plan to stay for decades.

Figuring out which mortgage offers will be best when you're buying a home is an important decision, but know that there will also be ways to lower your monthly mortgage payment after you've moved in.

Consider Refinancing Your Mortgage

Refinancing a mortgage is when you take out a new mortgage to replace your current loan. Refinancing can help you save money and lower your monthly payment if you can qualify for a lower interest rate or a mortgage without PMI. You may also be able to lower your monthly payment by refinancing to a loan with a longer term.

For example, if you have 22 years left on your current mortgage and refinance to a 30-year mortgage, spreading out the payments over an extra eight years will lower your monthly payment amount—at a cost. Depending on rates when you refinance, you may have to accept a higher interest rate than you currently have, and those lower monthly payments will also cost you an extra eight years in interest.

You'll also need to account for the closing costs on the new loan when you refinance. It can take several years to break even, so refinancing might not be a good idea if you plan on moving soon.

Remove Mortgage Insurance Payments

If you took out a conventional loan with PMI, or a government-backed FHA or USDA loan with a mortgage insurance premium (MIP), removing the insurance can lower your monthly mortgage payments.

With a conventional loan, the PMI will be automatically removed when you're scheduled to reach 22% equity—meaning the principal balance is at 78% of the home's original value. However, you can request to cancel PMI earlier—when you reach 20% equity.

If you're over 20% equity because your home's value has increased, you may need to pay for a new appraisal and then request to cancel your PMI based on the current balance and value. Alternatively, you could refinance the loan and may qualify for a PMI-free mortgage.

For borrowers who took out an FHA loan after June 2013, the MIP will be removed after 11 years if you put at least 10% down. If you put less down with an FHA loan, or have a USDA loan, the only way to remove the MIP payments is to refinance with a different loan that doesn't require mortgage insurance.

Recast Your Mortgage

If you've been paying more than the required amount, or have savings that you could put toward your mortgage, you may be able to lower your monthly payments by recasting your mortgage.

Unlike refinancing, recasting won't reset your loan term or change your loan's interest rate. Instead, recasting will reamortize your loan, which creates a new payment schedule based on the current principal balance.

For example, if you have a 30-year, $400,000 mortgage with a 3.65% APR, your monthly payment may be about $1,830. Ten years into the loan, your balance will be about $311,000.

Making an extra $11,000 payment won't lower your monthly mortgage payment, although it can lead to paying off the loan early. However, your lender may allow you to recast the loan based on the $300,000 principal balance. You'll keep the same term and interest rate, but your monthly payment drops to about $1,763, or $67 less a month.

When it's an option—only some mortgages lenders offer recasting and it's not available on government-backed loans—there may be a fee of around $200 to $250 for recasting.

Request a Mortgage Loan Modification

A mortgage loan modification may be another way to lower your monthly mortgage payment without refinancing. However, while recasting might work for people who can make extra payments, loan modification is generally for people who are struggling to afford their payments.

If you're having financial trouble, reach out to your loan servicer immediately, ideally before you miss a payment, to ask about hardship options. For example, a mortgage forbearance could allow you to skip a few payments if you're experiencing a short-term setback. A loan modification is a more medium- to long-term solution as it permanently modifies the terms of your loan.

Examples of loan modifications include extending your repayment period to lower your monthly payment, decreasing the loan's interest rate or (less commonly) reducing your loan's principal balance.

Remember the Big Picture

There's no one-size-fits-all answer when it comes to whether you should try to lower your monthly payment. Doing so can lead to paying more interest in the long run, but that might not be a concern if you sell the home or refinance in a few years. And, even if you have to pay more interest, lowering your monthly payment is likely a good idea if you need to free up room in your budget to afford all your bills. In short, consider the pros and cons to each approach and how they'll impact your overall financial situation.