Ways to Lower Your Monthly Mortgage Payment
Many homeowners refinance to lower their monthly mortgage payments. Generally, homeowners will want to refinance if the interest rate is lower than when you financed your home, or if you have an adjustable rate mortgage (ARM) that will soon have a higher interest rate than the current rate.
No matter what your reasoning, refinancing to lower your monthly mortgage payment will allow for extra income that can be put toward other things, like debts, expenses, investments, or even vacations.
Key financial strategies you can follow
Removing PMI. Private Mortgage Insurance, or PMI, is required by most lenders if the borrower is unable to put down less than 20% of the appraised home value or sale price. It is specific to conventional loans and provides some protection for the lender in cases where the borrower may default on the home loan.
What will you pay each month? Well, that varies based on how much money you put down, your credit score, and your insurer. If you are required to pay mortgage insurance, it will be included in your total monthly payment that you make to your lender, your costs at closing, or both. Typically, the premiums for private mortgage insurance can range from $30-70 per month for every $100,000 borrowed. But once you reach enough equity to equal 20% of your home’s value, you are able to remove PMI. Be sure to stay on top of your loan-to-value (LTV) ratio. And remember, this is specific to conventional loans. If you have a mortgage insurance premium (MIP) on your FHA loan, these rules do not apply. You should contact your lender to learn about your options or visit this article by the CFPB.
Reducing your interest rate. What may seem like a small numerical difference in your interest rate can be the difference between saving and spending hundreds of dollars each month for years to come. And with interest rates near historic lows, there’s a good chance you can refinance to reduce that rate.
Take for example a $300,000 30-year fixed rate mortgage with a current rate of 5.5% that has potential to refinance down to 4.5% (also assuming a 20% down payment was made. Choosing to lower your rate that 1% will save you about $150 a month, but will offer even greater savings in the long run -- nearly $53,000 in savings after 30 years.
Switching from an ARM to a fixed-rate loan. When used wisely, an ARM can be an effective home loan option. Just be sure you know when the interest rate is scheduled to fluctuate. ARM rate changes tend to move upward, resulting in higher monthly payments for you. A good way to avoid this is to refinance out of the loan as you’re nearing the end of the initial fixed-rate period.
Switching from an FHA to a conventional loan. FHA loans require higher mortgage insurance premium (MIP) payments as compared to conventional loans (which again have PMI). Let’s take a closer look at MIP. It has two components: an upfront premium (UFMIP) and an annual premium. The current upfront premium rate is 1.75% of the loan amount. The current annual premium is 0.85% for the most common category of FHA loans. Though, annual premiums can be lower for lower LTV values or mortgage terms of fifteen years or less. Regardless, it’s not an uncommon financial strategy for borrowers to refinance from an FHA to a conventional loan once the 20% equity requirement is met -- just so they can avoid further mortgage insurance payments.
A lower monthly mortgage payment is just one of the many benefits of refinancing your loan. Learn what programs are available, and how to get started, by calling the salary-based mortgage consultants at American Financing.