CNN
–
A lower monthly mortgage payment is helpful in many ways. Not only does a lower payment mean you have to spend less money on your home each month, but a large mortgage payment can make it harder to cover your daily expenses or save money for retirement, family vacation, or a rainy day.
Many lenders also want borrowers to have a debt-to-income ratio of less than 43%. This means that, in general, all of your monthly debt payments cannot exceed 43% of your gross monthly income. A lower mortgage payment makes it easier to achieve this benchmark.
So, if you want to secure a lower mortgage payment on a home you want to buy, or if you want a lower monthly payment on a home you already own, how can you do that? Fortunately, there are a few ways to achieve this goal. Here are five of the easiest ways to lower your mortgage payment, some of which can result in significant savings in the long run.
If you already own a home and want to cut your monthly mortgage payment, one strategy is to extend the life of your mortgage. This is usually done by refinancing your home to pay off the existing mortgage with a brand new one.
When it comes to refinancing, there are two ways to extend your mortgage. One option is to just start your mortgage from scratch, but another option is to completely change the repayment terms of your loan.
Let’s say you currently have a 30 year mortgage loan. If you refinance the balance of your current mortgage into a new 30-year mortgage, your monthly payments will decrease as you now spread the payments over a new 30-year period and at the same time start with a lower capital because you have already paid off part of the original mortgage to have.
If you currently have a 15 year mortgage, you can refinance into a new 20 or 30 year home loan, which will extend your repayment term and spread your payments over a longer period of time.
Connected: Why You Should Take A 15 Year Mortgage – and Why Not and.
How Much Can You Cut By Extending Your Home Loan? While the details will vary depending on your circumstances, a borrower who just started a 15 year mortgage at $ 250,000 at 4% APR would pay over $ 1,849 per month in principal and interest. If that person switched to a 30-year home loan at the same APR, their payment would drop to $ 1,194 per month.
Click here to compare offers from refinancing providers at LendingTree, an online loan marketplace.
Even if you don’t want to change your repayment schedule dramatically, refinancing can help lower your payment if you can set a lower interest rate than your current mortgage. The impact of a lower interest rate can be dramatic when it comes to your monthly payment, although the details will vary depending on your situation.
Consider this example: a 30 year home loan of $ 300,000 with an APR of 4% would require a monthly principal and interest payment of $ 1,432. If you can repay the same loan amount over the same term, but at 3% APR, the monthly payment drops to $ 1,265 per month.
Connected: 3 reasons why it’s not too late to refinance your mortgage.
iStock
A lower interest rate can reduce your monthly mortgage payment when you refinance.
While rates are no longer at their 2020 record lows, you can still get rates in the low 3% range on a 30-year mortgage. Depending on your current interest rate, this can still make a huge difference in your monthly payment, although it is important to keep an eye on the cost of refinancing to ensure that you actually save money in the long run.
For people who have already paid 10 years or more on a 30 year mortgage, there is another way to lower your interest rate – switch to a shorter loan. The interest rates on shorter home loans are usually lower. So if you currently have a 10 year mortgage, you may be able to refinance into a 20 year home loan for a lower interest rate and payment and still pay off your home in 30 years total.
Check your rates on LendingTree now and see offers from multiple lenders.
Another way to get a lower mortgage payment the first time you buy a home is to pay a larger down payment. This step means that you will borrow less overall, which inevitably translates into a lower monthly payment.
How much lower? For example, let’s say you want to buy a new home for $ 400,000 but you’ve only saved a down payment of $ 20,000 so far. The monthly principal and interest payment on a new 30 year mortgage for $ 380,000 would be $ 1,814 per month at 4% APR. In addition, you would also have to pay for private mortgage insurance (PMI) until you have at least 20% equity in your property. According to LendingTree, the PMI is typically between 0.15% and 1.95%, but it can reach 2.5% or more.
However, if you could save 20% on your loan amount, or $ 80,000, the monthly principal and interest payment on a new 30 year mortgage would be $ 320,000 to $ 1,528 per month with an APR of 4%. And with a down payment of 20% you avoid the PMI costs entirely.
Connected: Does it still make sense to save 20% when buying a house?
While the PMI can be automatically removed from your home loan once you have at least 22% equity, you may have the option to stop paying the PMI beforehand if you are ready to pay for an appraisal to prove you are now have at least 20% equity in your property. The advantage of this approach is that you don’t have to hassle refinance to lower your monthly payment.
However, if you know you have 20% equity in your home, you may prefer to fully refinance with a new lender, possibly stacking several of the above techniques into a new mortgage. If so, with 20% equity (or more) on your property, you could get a new home loan with no PMI and possibly even better rates and terms.
See if you qualify for a refinance that can lower your monthly mortgage payment.
Don’t forget that if you are willing to rent additional space, you can subsidize part of your monthly mortgage payment from someone else. This can mean converting the basement of your house into a separate apartment, but also looking for a roommate or occasionally renting out a room.
iStock
Consider renting out part of your home or hiring a roommate to help cover your monthly mortgage payment.
This option is certainly not for everyone and you should keep an eye on the rules of your current mortgage about renting your property, as well as any local rental regulations. However, it is worth considering renting out part of your home if you want to pay less for housing and other options on this list don’t work.
Connected: Before you take any cash out of your home with a refinance, know the pros and cons.
Lowering your mortgage payment might not be easy, but it can be worth the hassle when you add up the years of potential savings and have more free cash every month. Remember that refinancing your mortgage usually requires good or excellent credit, and that closing costs can hurt your long-term savings.
If you want to know if you can qualify for a lower mortgage payment, it is best to check with a lender or get a free mortgage quote on an online loan marketplace to find out your best options. You could be entitled to a lower interest rate, a lower monthly payment, or both if you are ready to take a few simple steps to start the process.
Learn more about how to lower your mortgage payment with LendingTree.
Would you like to refinance but are not sure about the next step? Read the CNN Underscored guide on How To Refinance Your Mortgage.
Get the latest in personal finance offers, news and advice at CNN Underscored Money.