Lenders generally check to make sure your mortgage is affordable when you first buy your home. Sometimes our circ*mstances change, however, and what used to be affordable may no longer be the case. That can add a lot of unnecessary financial stress as you worry about ways to make ends meet or even how to stop foreclosure.
Luckily, it doesn’t have to be that way. You have more power than you may realize to change your housing costs. We’ll explore your options for how to lower your mortgage payment and keep your home at the same time.
Understanding your current mortgage
Your mortgage servicer splits each of your mortgage payments into four separate categories, all of which contribute to the total payment amount. If you understand each of these four categories, you can figure out ways to tweak them individually. You can adjust them up or down, depending on your goals:
- Principal: The amount that actually goes toward paying down your mortgage balance.
- Interest: The amount that your lender charges, as dictated by your loan’s interest rate.
- Taxes: Property taxes that go to your local fire department, school district, etc.
- Insurance: Homeowners insurance that your lender requires. If you took out certain types of loans or put less than 20% down on your home, you may also pay for mortgage insurance.
Property taxes and homeowners insurance are generally charged on an annual basis. Your principal and interest payments, however, change over time depending on how far along you are in paying off your mortgage. Interest makes up the majority of your payments as you begin repaying the debt, while more of your payment goes towards paying down the principal as you near the end of repayment.
Most mortgages are also fixed-rate loans, meaning that your interest rate stays the same over time. If you have a variable-rate loan, your interest rate — and therefore your monthly payment amount — will change over time; sometimes it’ll be more affordable, and sometimes less.
The power of refinancing
One of the best ways to lower your monthly mortgage payments has traditionally been to refinance. This allows you to replace your current mortgage with a new mortgage that better aligns with your goals and abilities as they change over time. If you have a variable-rate mortgage and you’re tired of your monthly payment changing all the time, refinancing to a fixed-rate mortgage can offer you stability, for example.
Many people refinance for a longer term length and/or a lower interest rate, which can help them lower their monthly payments. This is a particularly good option if your credit score has improved since you first took out your mortgage or if you’re in a low-interest-rate environment.
Unfortunately, mortgage rates have been rising since early 2022. This makes it tougher for most people to actually get a lower rate in the current market, which negates the entire reason most people pursue a refinance in the first place. About one out of every three homeowners threw in the towel and were no longer considering a mortgage refinance because of these rising rates, according to a fall 2022 survey from Point.
If a mortgage refinance is off the table now for you as well, you’ll have to look at other options for how to lower your mortgage payments without refinancing.
How to lower your mortgage payment without refinancing
Luckily, there are still plenty of options available, and some may even help you save additional money in the long run.
Recast your mortgage
This process requires you to make a single lump-sum payment toward your mortgage (typically $10,000 or more) so that your principal balance is reduced. Your lender can then re-calculate your amortization schedule for a small fee, usually around $250.
Mortgage recasting is a much simpler process that keeps your current loan in place and simply lowers your monthly payment amount due to your lower principal balance. Most conventional loan lenders allow you to recast your mortgage, although it’s unavailable for government-backed mortgages such as FHA loans, VA loans, or USDA loans.
Cancel your mortgage insurance
Most conventional home loan lenders add an extra private mortgage insurance (PMI) charge to your monthly payment if you put down less than 20% for your home. Your lender is required to remove this charge automatically when your loan-to-value ratio reaches 22%, but you can actually contact your lender to request they remove the charge when you reach 20% equity in your home. Home values have been rising, and you may reach this amount sooner than you think.
Lower your homeowners insurance or property taxes
It’s always a good idea to shop around for insurance in case you can find cheaper premiums with another company. That can be tough to remember since homeowners insurance is somewhat obscured by your lender’s escrow process, but you have the right to find a cheaper homeowners insurance policy at any time.
You may also be able to lower your tax bill. Check with your local county for your home’s assessed value, which it uses to base your total tax bill on. If you think it’s higher than it should be, and you can back it up with data from comparable homes, you may be able to file an appeal to have your home’s value lowered. You may also be able to qualify for an exemption to reduce your tax bill, which many counties offer for low-income homeowners, senior citizens, etc.
If you’re able to lower your homeowners insurance or your tax bill, your mortgage servicer won’t need to collect as much into your escrow account to pay these each year. Thus, your monthly mortgage payment will be correspondingly reduced.
Consider a bi-weekly mortgage payment plan
Most lenders allow you to opt in to a bi-weekly mortgage payment schedule instead of making one large mortgage payment each month. Your monthly mortgage payment would then be cut in half. This takes the sting out of writing such a large check and can smooth out your cash flow between paydays, but it also has another added money-saving benefit as well.
When you make bi-weekly mortgage payments, you’ll make 26 payments in a year — enough for 13 full monthly payments, but within a 12-month span. This is akin to making one extra monthly payment on your mortgage each year that you may not even notice, which helps you pay your balance down even faster. Over time, this can even help you pay off your mortgage several years ahead of schedule.
Ask your lender for a loan modification
If you’re struggling to make your monthly mortgage payments or are already behind, check with your lender to see if they offer any debt relief options. Each lender offers its own loan modification program, which could include options such as temporary forbearance or permanently reducing your monthly payment by extending your loan term length or lowering your interest rate.
Your lender isn’t under any obligation to offer loan modification, and these options are typically limited to people undergoing financial hardship. You may need to write a letter to your lender and include documents to back you up, such as recent tax returns, a written budget, bank statements, etc.
Pay off your loan
If you have the option, one way to lower your monthly mortgage payments is to get rid of them entirely by paying off your loan. It’s understandable that not everyone can just pay off their mortgage at the drop of a hat, but you may have some options available to you:
- Using home equity financing options
- Cash windfall, such as an inheritance
- Selling stock options and investments
- Opting into a shared equity agreement
- Earning extra income with side hustles or strategic career planning
Final thoughts
Struggling to make your mortgage payment can be scary and frustrating, but you have more options than you might realize to change your situation for the better. If you’re having trouble figuring out which choice is best or if you just want a second opinion, a reputable fee-only financial advisor can provide unbiased guidance. If you can’t afford a financial advisor, reach out to the National Foundation for Credit Counseling for a referral to a reputable counselor who can provide affordable and personalized assistance.
