Ways to Lower Your Monthly Mortgage Payment
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For many Americans, their mortgage payment is their most significant expense each month. Often, people buy a home, and never think to negotiate the cost of their mortgage payments again.
As the years go by, their mortgage payment may even increase if they're escrowing taxes and insurance. Tax rates increase as the value of the home increases, and homeowner's insurance premiums will typically rise as the home's core components age.
Disclaimer – The information on this page is intended for general informational purposes only and not to provide legal or financial advice.
#1 – Shop for better insurance rates
Many times, people get a homeowner's insurance policy when they purchase the home and renew it each year without shopping around to see if they can find better options.
Additionally, if you've made improvements to your home, you want to let your insurance provider know. While cosmetic updates won't help lower your insurance rates, upgrades to the core components of the home can. For example, assuming all other things are equal, homes with new roofs are cheaper to insure than houses with aged roofs. Homes with updated PEX plumbing can received discounted rates over homes with outdated, galvanized plumbing.
Also, assess how much your home's contents are insured for. Sometimes, owners find that their contents coverage they're paying for is much higher than the value of the items in their home. The same goes for the land your home sits on; its value doesn't need to be included in the amount you're insuring the house for. Even if your home was declared a total loss due to fire or natural disaster, the land it's on would remain.
You can get lower policy rates by raising your deductibles, but be aware this also means you'll need to pay more out of pocket if you ever need to make a claim.
You should also ask your insurance company what items you could add or upgrade in your home to reduce costs. For instance, installing an alarm system could reduce your insurance rate by up to 5%. If you're aged 55 or over and retired, you might be able to get a retiree discount. Also note that some insurers will offer a bundle discount if you're using them to ensure your other valuables, such as automobiles, as well.
Contact 3-5 insurance companies (or more) and see if you can negotiate a better policy rate than what you're currently paying.
#2 – Get rid of PMI
Private mortgage insurance (PMI) is a common component to mortgages where the initial downpayment for the home was less than 20%. PMI is calculated as a percentage of the home's loan balance and typically ranges between 0.5% to 1% of the balance on an annual basis. On a $250,000 loan, this can account for $100 to $200 of your mortgage payment due each month.
PMI can be removed once the balance of the loan is 80% or less of the homes' value (for primary residences). However, mortgage lenders are not required to remove PMI automatically until the equity in the home reaches 78%.
Additionally, PMI is usually based on the value placed on the property by the county tax assessor, which is often below actual market value. It's not uncommon for a home to be assessed for a double-digit percentage less than the owner could obtain for the house if they listed it for sale on the open market.
If you think you have 20% equity in your home based on its market value, it may be beneficial to contact your mortgage company. You can request an appraisal to potentially have the PMI removed from the loan.
#3 – Tax abatements or exemptions
You may be eligible for abatements or exemptions for your property taxes. In Texas, the homestead exemption is the most common exemption (available to homeowners who claim the home as their principal residence). Still, there are additional exemptions such as a senior exemption (available to homeowners over age 65), disability exemptions, and more.
While homestead protection is automatic in Texas, a homestead tax exemption is something you need to file for. Tax exemptions have the potential to reduce your tax liability by 20% or more.
In Texas, our property tax rates are high compared to many other states. So, the savings from applying for applicable exemptions has the potential to significantly reduce your monthly mortgage payments if you are escrowing your taxes. If your yearly property taxes are $5,000 per year, tax exemptions could reduce your monthly PITI payment by $83 per month or more.
#4 – Pay attention to – and fight – any raise in your property taxes
Tax increases can come in the form of a higher assessed property value or a failure to file for applicable exemptions. It's free to protest your property taxes, so we recommend you always protest any increase. You can find more information about protesting your property taxes here.
#5 – Consider renting a room out
If you have an extra, unoccupied room in your home, you may want to consider renting it out to bring in some extra income you can use to put toward the mortgage each month. You can rent out rooms on a short-term basis via AirBNB or find a long-term roommate to share your home via a lease agreement for a specified amount of time.
Note – you'll want to read over any deed restrictions that may apply to renting out your home to ensure you're not breaking any applicable rules when doing so.
#6 – Ask for an interest rate reduction
If you bought your home when interest rates were higher than they are now, and have equity, you might be able to get a reduction in the interest rate of your loan. You can achieve this by asking your mortgage company for a rate reduction. This is most often done via a loan modification, which is similar to refinancing.
For instance, if you bought your home with an 8% interest rate on your mortgage loan, and your loan was for $160,000, you're paying $1,467 in principal and interest each month. If you can get your lender to lower your interest rate to 5.5% through a rate reduction/loan modification, your monthly principal and interest payments would reduce to $1,135. That could amount to a savings of over $332 per month apples to apples.
Loan modifications are typically calculated on the current mortgage balance, so if your balance has lowered significantly since purchasing the home, that savings could be even higher.
Let's say we have a homeowner named Jane. She purchased her home for $200,000 ten years ago, with 5% down. She had to obtain private mortgage insurance for .6% of the loan balance. The house is currently 40 years old, and has a market value of $280,000, even though the assessed value for property taxes is $240,000. She is paying $1,600 per year for her property insurance.
The home is her primary residence, but she didn't realize there was a difference between automatic homestead protection and a homestead property tax exemption she needed to file for and has a tax bill of $7,000 this year. When she bought her home, the going interest rate was 7%; the current going interest today is 4%.
Jane approaches her loan company and asks for a loan modification with a lower interest rate and a new 30-year term. The loan is modified at the current balance owed of $155,000, with a new interest rate of 4%. She incurs $2,000 in fees from the lender for the modification that is tacked onto the current balance. She also pays $500 out of pocket for an appraisal that results in her PMI being removed from the loan.
Jane has shopped around for insurance and found that the new roof she put on last year helps her get a lower yearly premium of $1,480. She also filed for her homestead tax exemption, which reduced her annual tax payment to $5,600.
|Expense||Current||New at 30 years||New at 20 years|
|Principal & Interest||1197.54||749.54||951.39|
This scenario would result in Jane being able to lower her monthly mortgage payment from $2004.20 to $1,339.54 – a monthly savings of $664.66. Even if Jane didn't restart her term and did the modification on the original timespan left of 20 years, her savings would be $463.81 per month. Her total out of pocket cost in this scenario is $500 for the appraisal.
Putting in the research and effort required to lower your mortgage payment has the potential to reduce significantly what is likely your largest monthly expense.