Here’s How Savvy Homeowners Lower Their Monthly Mortgage Payments
In almost every situation, an individual’s largest monthly payment is his mortgage. Thus, if you want to increase your financial flexibility and create more breathing room in your budget, lowering your mortgage payment is a great place to start.
4 Tips for Lowering Your Monthly Mortgage Payment
Home affordability is a subjective term. Lenders typically use what they call a debt-to-income (DTI) ratio that calculates a borrower's total debt payments and compares them against their gross monthly income. They want to see a ratio of 36 percent or less. Financial advisors are often much more conservative. They recommend spending no more than 25 percent of take-home pay on a mortgage. (Thus, if you bring home $4,000 per month, your mortgage payment should be $1,000 or less.)
Every situation is different, but it’s safe to say that you should only spend as much as you comfortably can without feeling financially stressed or strained. This generally means between 25 and 36 percent of your income. (It’s up to you whether this means gross or net income.) If you’re outside of this range – or even on the fringes – you may benefit from lowering your monthly payment. Here are some tips for doing so:
1. Refinance to a Lower Rate
You’re never permanently locked into a loan. Just because you agreed to a 15-year or 30-year mortgage, doesn’t mean you’re stuck with it for that amount of time. There are plenty of opportunities to get out. And if you have bad terms or a high interest rate, that’s exactly what you should do.
Shop around and compare home loan products to find an option that allows for the lowest monthly mortgage payment. If you find one that’s superior to your current loan, refinance and save the difference.
2. Creatively Structure Loan Terms
There’s ample room for creativity with how loans are structured. While most borrowers select a conventional mortgage with a locked interest rate over a period of 15 or 30 years, you could opt for an adjustable-rate mortgage (ARM).
ARM loans typically come with terms of 3/1, 5/1, 7/1, and even 10/1. The first number represents the number of years that your initial interest rate is fixed. The second number represents the frequency with which the interest rate can change after the introductory period. In most cases, it’s one year.
If you know you’ll be moving or refinancing within a few years, an adjustable rate mortgage is ideal. It allows you to obtain a lower interest rate (therefore minimizing your monthly payment) without compromising.
3. Pay Down 20 Percent (Eliminate PMI)
Though many lenders will allow homeowners to purchase a home with just 3.5 percent down, it’s recommended that you pay the principal down to 80 percent as quickly as possible.
Until you reach 20 percent down on your mortgage balance, you’ll owe Private Mortgage Insurance (PMI). This is a form of insurance that lenders are required to have in order to offset the costs associated with loan defaults. It costs the borrower between 0.5 percent and 1 percent of the entire loan amount on an annual basis. On a $200,000 loan, this can cost as much as $2,000 per year (or $167 per month).
If you haven’t already, make it your goal to pay extra on the house so that you can eliminate PMI. It’ll provide instant relief to your budget.
4. Shop Around for Lower Insurance
Homeowners insurance is often built into the monthly mortgage payment. Thus, if you want to lower your payment, you should shop around and find a better rate. Additionally, you could raise your deductible, bundling your home and auto policies, or seek out discounts for things like home security systems.
Establish Flexibility With a Lower Mortgage Payment
Financial flexibility is a key component to living a happy and successful life. When you have breathing room in your monthly budget, you’re able to make better decisions and be more generous with your resources. Less energy is wasted on the stressful shuffling of money and debt. Instead, you’re able to live your life to the fullest.
If you’re currently feeling the pressure of a high mortgage bill, consider your options and determine whether opportunities exist to lower your payment. With a few strategic tweaks, you could find yourself in a much more desirable place.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes.
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