How To Lower Your Mortgage Payment

For most people, housing is their biggest monthly expense. And if your mortgage occupies too much space in your budget, you might be looking for ways to lower your payments. Luckily, solutions exist — and some of them are rather simple and cost-effective.

Below, CNBC Select explains five possible ways to pay less for your mortgage and what you need to take advantage of them.

If you have a conventional mortgage and you put less than 20% down when buying your home, you’re probably paying private mortgage insurance (PMI). Unlike homeowners insurance, PMI does nothing to protect you financially. Instead, it’s meant to reimburse the mortgage lender if you stop making your payments.

Most of the time, PMI is a fee your mortgage company adds to your total monthly payment. Depending on your loan amount and what your credit score was when you purchased the house, PMI can add hundreds of dollars to your monthly bill.

The good news is that you can eventually get rid of PMI by building enough equity in your home. Your mortgage lender will automatically cancel your mortgage insurance once you reach 22% equity. If you don’t want to wait that long, you can request your lender in writing to drop the PMI requirement when you reach 20% equity. Meeting certain criteria, such as having a good payment history and no second mortgage, can increase your chances of dumping your PMI at 20%, but it’s not guaranteed.

Note that if you have an FHA loan, you can’t request to cancel your mortgage insurance premium (MIP). If your down payment was at least 10%, you’ll pay MIP for the first 11 years of your mortgage. If it was less, you’ll pay MIP for the life of the loan. The only way to get rid of these fees earlier is to refinance your FHA loan into a conventional loan.

Speaking of refinancing, it can also be a way to lower your mortgage payment. Refinancing involves taking out a new mortgage on your property to replace your current loan. Ideally, you can get a lower interest rate and significantly decrease your monthly payment. However, that’s not always the case — and the process itself is often expensive.

Mortgage rates fluctuate based on factors outside of a homeowner’s control, such as inflation, Federal Reserve monetary policy and the housing market conditions, among others. If the average interest rate on refinancing is higher than what you currently pay, this solution isn’t likely to bring you any savings.

Besides, the terms you’ll get depend on your credit history and how much equity you have in your home. For instance, if your credit leaves a lot to be desired and you have less than 20% in equity, the lender might consider you a risky borrower. You may still qualify for refinancing, but the lender won’t be able to give you the best rate.

Finally, remember that refinancing means taking on a new mortgage loan. This means paying closing costs (typically, between 2% and 6% of the loan amount). Needless to say, it can be a significant sum. You’ll have to find the break-even point to determine when refinancing will start saving you more money than you’ve spent on it. You can use a refinance break-even calculator to figure out how many months or years it will take. Ask yourself whether you’re planning to live in your home for that long.

If the conditions are right and you’ve come to the conclusion refinancing is the right choice, make sure to shop around for lenders so you can pick the best terms. CNBC Select recommends Ally Bank if you’re looking to save on lender fees. You can get a custom quote online with no impact on your credit score. Better is another excellent option — you’ll pay no origination fees and can receive up to $3,500 in credits to offset some of the closing costs.

If you already have a low interest rate on your conventional loan and refinancing doesn’t make sense for you, look into recasting your mortgage. When you recast your loan, you make a large lump-sum payment toward the balance. Your lender re-amortizes your mortgage, decreasing the balance while other terms of your loan remain the same. As a result, you owe less in interest and pay lower monthly payments.

Unlike with refinancing, there are no closing costs. However, the lender may charge an administrative fee which is usually a few hundred dollars.

To be eligible for recasting with your lender, you’ll probably need to meet a few requirements, such as having enough equity in your home and a large enough lump-sum payment. Rules can vary by lender. Additionally, note that not all lenders provide the recasting option. If your lender doesn’t advertise it, get in touch and see if it’s available.

If you pay your homeowners insurance monthly (as opposed to annually), you have more flexibility to switch your homeowners insurance company if you find a better deal with a different carrier.

Gather quotes from multiple companies and do some comparison shopping. Make sure to pay attention to other aspects, such as the carrier’s customer service and reliability. You don’t want to end up with a provider that will take a long time to respond or is notorious for not paying reasonable claims.

CNBC Select picked Nationwide as the best overall homeowners insurance company. Coincidentally, it’s also our top choice for the most affordable companies. Besides generally low premiums, you can also qualify for one of their many discounts.

Before you switch, check with your current insurance company if they charge a cancellation fee for terminating coverage early. If they do, consider whether the savings will offset the fee. Finally, make sure your new policy is in place before the old one ends to avoid a lapse in coverage — which can lead to higher insurance rates.

If you can’t afford your mortgage payments due to a major life event, such as losing your job, you may qualify for a mortgage loan modification. The program changes the terms of your home loan to help you avoid foreclosure. This can include lowering your interest rate, extending the repayment term or even reducing the principal balance.

The loan modification process and requirements vary by lender. Most likely, you’ll need to provide information demonstrating your financial situation like documentation about your income and total mortgage payments. After you submit an application, the lender might require that you complete a trial payment plan to prove your ability to make consistent payments. If you succeed and get approved, you’ll receive an offer outlining the terms of the modified loan.

There are multiple ways you can reduce your monthly mortgage payment. Some of them require quite a bit of work and upfront expenses, while others, like switching home insurance providers, are simple and cost-effective. When all else fails and you can’t afford your mortgage, you might have to consider other solutions, such as renting out your home or even selling it.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every mortgage product review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of mortgage products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best mortgage products.

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