Paying down a mortgage with a high interest rate can feel like swimming against the current, but refinancing isn’t the right choice for everyone — especially when refinance rates are high. Luckily, it’s fairly simple to learn how to lower the interest rate on a mortgage without refinancing.
We’ll run through all the options and cover how to choose a strategy tailored to your situation. If you’re facing financial hardship that you can document, you’ll have a few more choices compared to someone who just wants to reduce their mortgage payment.
The simple answer is yes, your lender may agree to lower your interest rate without a refinance. This is known as a loan modification — it’s a tool designed to help you reduce your mortgage payments and avoid default.
You’ll first need to explain to the lender why you’re experiencing financial hardship to qualify for a loan modification. In many cases, you also must prove that you’ve already missed mortgage payments, or will fall behind in the next 90 days.
Using a loan modification, your lender may adjust your mortgage by:
- Lowering your mortgage rate
- Extending your loan term
- Reducing your principal balance
- Adding your past-due balance to your outstanding loan amount and recalculating your repayment term
- Converting your loan type (for adjustable-rate loans or interest-only mortgages)
Consequences of a loan modification
Although a loan modification can help pull a homeowner back from the brink of default or foreclosure, there are also some potential negative consequences. Since you often have to show that you’ve already missed some payments to qualify for a modification, this can negatively impact your credit. Falling just 30 days behind on your mortgage payments can drop your credit score by as many as 110 points, according to FICO research.
Your mortgage rate represents the cost of borrowing money to buy a home, and it’s expressed as a percentage of the loan amount. Mortgage rates have a major influence on a home loan’s affordability.Here’s an example: Let’s say you’re quoted a 6.4% interest rate on a 30-year mortgage for a $350,000 home and you’re making a 20% down payment ($70,000). The principal and interest portion of your monthly payment would be approximately $1,751.
If you take that same loan but increase the interest rate to 7%, your estimated principal and interest payment would jump to $1,863 — a monthly difference of $112, and a $40,115 difference in interest over the life of the loan.
How to lower your mortgage payment without refinancing
Most people who want to lower their mortgage interest rate are looking for a way to solve the problem of high monthly payments, but there are many other ways to lower your mortgage payments — you don’t have to change your mortgage rate or refinance your loan.
Options only for homeowners in financial distress
Forbearance
Mortgage forbearance is when your lender agrees to reduce or pause your mortgage payments for three to six months to help you avoid foreclosure. Forbearance can give you some time to get back on your feet, but it won’t reduce how much you owe. Once the forbearance period ends, you’ll have to pay back any past-due amount — either with monthly installments or in one lump sum.
If your forbearance is ending and you’re still struggling financially, you can usually apply for an extension. But forbearance is intended to be a short-term solution to short-term problems like job loss, acute illness or natural disasters. If you need a more permanent solution, know that forbearance doesn’t affect your ability to get a loan modification in the future.
Options for any homeowner
Recast your mortgage
A mortgage recast is when you make a large, lump-sum payment toward your mortgage’s outstanding principal balance. Your lender then recalculates your monthly payments based on that reduced balance, which means that the payment amount drops. Your loan repayment term and interest rate won’t change, however.
You may need a minimum lump-sum amount of $5,000 to $10,000, as well as potentially have to pay a recasting fee. Check with your lender for specific requirements.
Government-backed loans can’t be recast
FHA loans insured by the Federal Housing Administration, VA loans backed by the U.S. Department of Veterans Affairs and USDA loans guaranteed by the U.S. Department of Agriculture aren’t eligible for recasting.
Drop your mortgage insurance
If you used a conventional loan to buy your home and put down less than 20%, chances are you have private mortgage insurance (PMI), which adds a significant cost to your monthly mortgage payment amount. Once you’ve built 20% equity in your home, you can cancel your PMI, which will bring down your monthly payment amount.
Things are a bit more complicated if you have an FHA loan, since FHA mortgage insurance premiums are harder to drop. If you put down at least 10% when you closed on your FHA loan, you can get rid of your FHA mortgage insurance after 11 years. Otherwise, the only way to drop the insurance is by refinancing into a different loan. If you refinance into a conventional mortgage, just make sure it’s after you have at least 20% equity, so you avoid getting stuck with PMI premiums.
Make biweekly payments
It’s more of a long game, but making biweekly payments can save you money and eventually shorten your loan term. It’s also a way of reducing your payment amount, since you’re essentially always making half-payments instead of having to pay the full amount in one go.
Using this strategy, you’d make 26 biweekly payments over the course of a year, which works out to 13 full payments (instead of the usual 12). If you start biweekly payments when you first borrow your mortgage and continue them throughout your loan term, you’d end up shaving off more than five years from your repayment period. You’d also save tens of thousands of dollars in interest charges.
Use your home equity to pay off the loan
If you have significant equity in your home, you can use a second mortgage to convert some of that equity to cash — then use that cash to pay off your original mortgage. While this can be a risky and complicated move, it can make sense for borrowers who qualify for a home equity loan or home equity line of credit (HELOC) with a lower rate than their first mortgage. It may also appeal to borrowers who want to take advantage of the interest-only payments offered by many HELOCs for the first 10 years (also known as the HELOC “draw period”).
Shop for cheaper homeowners insurance
It’s a lot easier to shop for homeowners insurance these days. You can use rate comparison websites to get quotes from multiple insurers, and you’ll only have to enter your information once. An easy way to find out if you’re paying more than you should is to look up the average home insurance premium in your state. If your premium is more expensive, consider changing insurers to reduce your monthly mortgage payment.
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Reduce your tax bill
The amount you pay in property taxes is determined by how much the government believes your home is worth. Take a look at your property’s tax card and make sure that all of the details — especially the assessed value — look correct to you. Inaccuracies can artificially inflate your bill, and it’s possible to request a reevaluation if you think anything is off.
