Ways to reduce the mortgage payment

The housing market crash of 2009 caused chaos. People were being laid off and couldn’t afford their mortgages, which were now underwater. Interest rates have come down to help stabilize the market. They rose and then fell sharply again in 2021 after the pandemic to stimulate borrowing.

It was a great time to buy a home. Let’s say you were able to purchase a $750,000 home with a 20% down payment of $150,000 and an interest rate of 3.885% on a 30-year loan. Your monthly payment will be $2,825 per month, excluding taxes, insurance and other fees. The same loan with an interest rate of 6.885% will cost you $3,946.

The good news for borrowers is that the Fed’s recent interest rate cuts mean it’s cheaper to borrow money. Stacey Pratt A California mortgage broker and real estate agent says that last time money was cheap, home prices skyrocketed. “It was really hard for people to buy.” But she believes that this time everything is different. “I predict it will be a gradual reduction, but there will be a reduction.”

But for those who currently have a mortgage, regardless of when you purchased your home, here are some steps to consider to lower your monthly bill.

Ditch the mortgage insurance

I got a letter from my lender telling me that the house I bought in 2018 went up and it was possible to waive my PMI (Private Mortgage Insurance) which was costing me $92 a month. After an appraisal, the bank determined that my home had indeed increased to 80% or more of the loan’s value. That’s the magic number: If you put less than 20% down on a conventional 30-year loan, you’ll also be burdened with PMI. I asked Pratt if PMI was a scam. After all, won’t they get my house if I default?

Pratt explained, “What if you overpaid and went under?” This happened a lot in 2009. PMI is a payment that makes the bank feel better about you defaulting on your secret mortgage. On the other hand, if you have a loan but not 20% down, PMI could be the difference between owning and not owning that home.

Credit karma has a calculator to help you figure it out, and a better credit score means a lower PMI. You may need to do some math to figure out if you want to put that extra money in to save for a down payment on a home later, or if owning a home that will likely appreciate is worth the extra money each month. This is a great conversation to have with your mortgage broker or financial professional.

Refinance

Yes, refinancing can be expensive. If you plan to move in the next year or two, it might not be worth it. But if you plan to own the property for a long time, it may be a smart move. Take a close look at the numbers to see when you’ll pay back those costs and start saving.

Pratt suggests talking to a mortgage broker about options — even a percentage or a point and a half can be a significant drop. Your PMI is also revalued because refinancing involves a new valuation.

Note that refinancing resets the clock. If you plan to pay off the loan in 10 years, you’ll have to start your schedule over, depending on the terms of your new mortgage.

Reverse mortgage

It’s for older homeowners who want to increase the value of their home without having to sell it — the mortgage company takes the security and makes regular payments to the borrower. Borrowers must be at least 62 years old and must pass a background check to make sure they understand how it works. If the borrower only lives for a year or two after getting the reverse mortgage, there will likely still be equity in the home. But, Pratt says, if a borrower gets a 70-year loan and lives to, say, 120, collecting payments all the while, the mortgage company takes a loss. This is also one of those agreements that you need to be absolutely clear about if you plan to leave your home to your heirs.

Mortgage renewal

Here is an option for people who have a lot of money, saved, received unexpectedly or transferred to cash from other investments. Pratt cites the example of someone taking out an $800,000 loan on a new home before selling the current one. When that first home sells in a few weeks and the borrower has $300,000 in cash, they can pay that off the existing mortgage, making the new loan amount $500,000. At 6% over 30 years, the monthly payment will drop from $4,796 to $2,998.

Estimate insurance and taxes

Many borrowers choose to include property taxes and home insurance in their monthly payment. Check with your insurance agent to make sure you’re getting the right coverage at the best price. If the value of the property has decreased, it may be worth contacting the IRS for a lower assessed value; many people did this successfully during the 2009 crash. But be aware that it can also backfire if the county reassesses your property for a higher value and you end up paying more in taxes.

One last thought

Do today’s low interest rates mean we are at the beginning of a downtrend? You may want to wait, but never take anything for granted. “I wouldn’t tell anyone to gamble and wait because interest rates change every day. And you can always reconnect in 6 months or a year again,” says Pratt.

Almost any purchase is a guess – will eggs be cheaper tomorrow? Will this car company offer a huge discount next month? But the best way to transfer any money is to find out as much as you can about how the changes will affect your situation before you sign a bunch of papers. Math isn’t always fun, but it’s definitely your friend.