How to reduce mortgage payments

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A smaller monthly mortgage payment is useful in every sense. Not only does a smaller payment mean you need to spend less money each month on your home, but a large mortgage payment can make it difficult to cover your day-to-day expenses or save money for a retirement, family vacation, or a rainy day.

Many lenders also want borrowers to have a debt-to-income ratio below 43%. This means that, generally speaking, all of your monthly debt payments should be no more than 43% of your monthly gross income. A smaller mortgage payment makes it easier to reach this benchmark.

So, if you want to provide a lower mortgage payment for the home you want to buy, or if you want a lower monthly payment for the home you already own, how can you do that? Fortunately, there are several ways to achieve this goal. Here are five of the easiest ways to lower your mortgage payments, some of which can lead to significant savings in the long run.

If you already have a home with a monthly mortgage payment that you want to downsize, one strategy is to extend your mortgage. This is usually done refinancing your home repay your existing mortgage with a new one.

When you refinance, there are two ways to extend your mortgage. One of them is to simply start over from the very beginning, and the other is to completely change the terms of the loan repayment.

Let’s say you have seven years of a 30-year mortgage. If you refinance the principal remaining on your current mortgage into a new 30-year mortgage, your monthly payments will drop because you are now spreading payments over the new 30-year period and at the same time starting with a lower principal. because you have already paid off some of the original mortgage.

Or, if you currently have a 15-year mortgage, you can refinance a new 20-year or 30-year mortgage, thereby lengthening the loan term and spreading payments over a longer term.

Connected: Why You Should Get a 15 Year Mortgage – And Why Not

How much can you reduce your payment by providing a home loan? While the details will vary depending on your circumstances, a borrower who has just started a 15-year $ 250,000 mortgage with a fixed annual interest rate of 4% will receive over $ 1,849 per month in principal and interest. If this person had switched to a 30-year home loan at the same annual interest rate, their payment would have dropped to $ 1,194 per month.

Click here to compare offers from lenders for refinancing at LendingTree, the online loan marketplace.

Even if you don’t want to drastically change your repayment schedule, you can still lower your payment through refinancing if you can lock in 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 specifics vary depending on your situation.

Consider the following example: A $ 300,000 30-year home loan with an annual interest rate of 4% would require a monthly principal and interest payment of $ 1,432. If you can repay the same loan amount over the same period, but at 3% per annum, the monthly payment will drop to $ 1265 per month.

Connected: 3 Reasons You Shouldn’t Wait For Mortgage Refinancing

A lower interest rate can reduce your monthly mortgage payment when refinancing.

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A lower interest rate can reduce your monthly mortgage payment when refinancing.

Until interest rates are no longer at an all-time low As we saw in 2020, you can still get rates in the 3% range on a 30-year mortgage. Depending on your current interest rate, this can still make a big difference to your monthly payment, although it is important to keep your refinancing costs in mind to ensure that you are truly saving money in the long run.

For people who have already paid 10 years or more on a 30-year mortgage, another way to lower the interest rate is to switch to a shorter loan. Interest rates are generally lower on shorter home loans, so if you already have a 10 year 30 year mortgage you can potentially refinance a 20 year home loan to provide lower interest rate and payments while still paying off your home a total of 30 years.

Check your bids now on LendingTree and see offers from multiple lenders.

Another way to ensure a lower mortgage payment on your first home purchase is to make a higher down payment. This step means that overall you will borrow fewer loans, which will inevitably lead to a lower monthly payment.

How much lower? Let’s say you want to buy a new home for $ 400,000, but so far you’ve only saved up $ 20,000 in down payment. The monthly payment of principal and interest on a new 30-year mortgage in the amount of $ 380,000 will be $ 1,814 per month at 4% per annum. In addition, you will also have to pay for private mortgage insurance, or PMI, until you have at least 20% of the equity in your property. In accordance with LendingTreePMI usually ranges from 0.15% to 1.95%, but can reach 2.5% or more.

But if you could save 20% of the loan, or $ 80,000, the monthly principal and interest payments on a new $ 320,000 30-year mortgage would be $ 1,528 per month at 4% per annum. And with a 20% down payment, you also completely avoid PMI costs.

Connected: Does it make sense to save 20% when buying a home?

While PMI may be automatically excluded from your mortgage, once you have at least 22% equity, you may have a chance to stop paying PMI before doing so if you are willing to pay for the assessment to prove that you now have at least 20% of the equity in your property. The advantage of this path is that you don’t have to go through the hassle of refinancing to keep your monthly payment down.

However, if you know that you have 20% equity in your home, you may prefer to refinance with a new lender, perhaps to combine several of the above methods into a new mortgage. In this case, if you own 20% or more of your shares, you can get a new home loan without PMI. as well as potentially even better rates and conditions.

See if you qualify for refinancing, which can lower your monthly mortgage payment.

Finally, don’t forget that you can ask someone else to effectively subsidize a portion of your monthly mortgage payment if you’re willing to rent out the extra space. This may mean converting your basement into a separate apartment, but it may also require finding a roommate or sometimes renting out a room.

Consider renting out part of your home or finding a roommate to cover your monthly mortgage payment.

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Consider renting out part of your home or finding a roommate to cover your monthly mortgage payment.

This option is certainly not for everyone, and you should be mindful of your current mortgage rules for renting out your property, as well as any local rental regulations. But it is worth considering renting part of your home if you want to pay less on your rent and the other options on this list will not work.

Connected: Know the pros and cons before taking cash from home with refinancing

Reducing your mortgage payments can be tricky, but the hassle can pay off when you add up years of potential savings and have more cash on hand each month. Just remember that refinancing a mortgage usually requires a good or excellent credit rating, and that closing costs can affect how much you save in the long run.

If you are wondering if you can qualify for a lower mortgage payment, your best bet is to contact a lender or get a free mortgage quote from an online loan marketplace to find out your best options. A lower interest rate, a lower monthly payment, or both can be yours if you’re willing to take a few simple steps to get you started.

Learn more about how to reduce your mortgage payments on LendingTree.

Do you want to refinance but don’t know what to do next? Read the CNN Underscored guide at how to refinance a mortgage

Get all the latest personal finance deals, news and tips on CNN Underscored Money

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