Does your home mortgage bill feel like it's crushing you? Want to lower the monthly payment? Here are four ways you can do so.
- Refinancing your mortgage can lower your payments and is a good option for newer loans.
- Drop your private mortgage insurance after you've gained 20% equity in the home.
- If you have a shorter-term loan, have it extended to a 30-year loan.
- You can have the home's tax assessment reappraised if the market value of the home has dropped.
Refinance Your Mortgage
Should you refinance? The answer depends on two factors: the age of your loan and the difference between your current and potential new interest rate.
Home loans amortize, which means you pay mostly interest towards the beginning of the loan term and mostly principal towards the end of the term. As a result, the interest rate is more important toward the start of a term. The interest rate makes less of an impact towards the end of the term when your payments are predominantly principal. In other words, the newer the mortgage, the stronger the argument is in favor of refinancing for a lower rate.
But refinancing turns the amortization clock back to square one and also gobbles a few thousand in closing costs, so a small difference between your old and new interest rates — say, 0.25% — might not be justified. Run the numbers to see whether refinancing is right for you if the interest rate spread is 0.5% to 1.0% or higher.
Drop Your PMI
Are you paying private mortgage insurance (PMI)? If you bought your home with a down payment that's less than 20%, you might be paying PMI. It adds hundreds or even thousands of dollars to your mortgage each year.
There's good news, though: You won't be stuck paying PMI forever. First, repay enough of the mortgage that you've gained 20% equity in the house. (You can also gain equity sooner if your home's value rises — but, of course, you have no control over that.)
Then contact your lender to inquire about the process of dropping your PMI. Lenders won't drop the PMI automatically — you'll have to request it. However, servicers are required to automatically terminate PMI on the date your principal balance is set to reach 78% of the original value of your home, if you have made payments on time. Many lenders will send an appraiser to determine your home's value before the lender verifies that you own a 20% equity stake.
Get a Longer Loan
Suffering under the hefty monthly payments that come with 15-year or 20-year mortgages? Extend your mortgage into a conventional 30-year term to cut your monthly payment.
The bad news is that your interest rate will rise. The good news is that you can still choose to make additional payments on the mortgage as if you were paying a 15-to-20-year loan. These extra payments will help you satisfy the loan more quickly, without obligating you to make massive payments if, say, there's an emergency that leaves you short on cash for a month or two.
Challenge the Tax Assessment
Here's an uncommon way to lower your monthly home payment: you can fight the tax assessment.
A conventional mortgage payment consists of your principal payment, your interest payment, and your "impounds," which is a monthly payment that the lender puts towards your property taxes and homeowner's insurance.
If you default on your property tax bill, the county can put a lien on your house. That lien will take priority over the lender's lien.
As a result, the lender collects your property taxes each month to protect its interest in your home. This payment sits in escrow until the yearly property tax bill is due. Property tax is based on the county's tax assessment of how much your home and land are worth.
An "assessment" is different from an "appraisal." The county assesses your home for tax purposes. A private company does an appraisal, generally for loan and purchasing purposes.
Many of these assessments are too high, especially in the wake of the housing crash, which diminished home values. Sometimes assessments are also too high if the area has been re-zoned, the new zoning has caused home prices to decline, and the declined prices aren't reflected in the assessment.
Homeowners can protest the assessment by filing a protest with the county or requesting a hearing with a state board. If the protest is approved, the homeowner's taxes will drop, as will their monthly mortgage payment.