It doesn’t take long to deplete your monthly budget when you are saddled with a mortgage payment. Luckily for borrowers, there are ways to reduce your mortgage rate and free up funds to invest, pay off debt or afford the necessities of life.
Whatever your motive — to lower your rate or term or rate type, to make home improvements, to consolidate debt — refinancing is the most popular and convenient way to reduce a mortgage interest rate. However, refinancing isn’t always the best route for homeowners wishing to cut down their monthly payments.
Just as one has to qualify for a mortgage, homeowners have to qualify for refinancing. If your credit is poor and a refi doesn’t fit into your short-term goals, it might not be worth your while. And with mortgage rates at historically high levels (and the closing costs of a new loan to consider), banking on replacing your mortgage loan might turn out to be a pointless endeavor.
Short of moving and downgrading to bring about a new lower mortgage, there are alternative strategies you can use to save money and reduce your mortgage rate without refinancing.
Recast Your Mortgage
Recasting a mortgage is a great option to lower payments but it will only be useful to those who can afford extra or lump-sum payments. As Cliff Auerswald, president of All Reverse Mortgage, told The Balance, “If you’ve inherited a significant amount of cash or saved up for some time, consider the cost benefits of the mortgage recasting versus other investment options.” By making periodic extra payments or putting a wad down on your loan, you won’t get your interest rate or terms changed — but your lender will recast, or calculate, your monthly payments based on what you have paid down and what you have remaining.
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Request a Loan Modification
Some mortgage lenders will make concessions for borrowers who are struggling financially or falling behind on payments by temporarily or permanently modifying your home loan or granting mortgage forbearance. According to The Mortgage Reports, modification changes the terms on your mortgage without a refinance. “To achieve the lower payments, the lender may reduce your interest rate, forgive a portion of the balance, extend the term of the loan or some combination of the three,” stated SmartAsset.
Cancel Your Mortgage Insurance
Private mortgage insurance (PMI) is generally required by lenders for a conventional loan if you put less than 20% down on the purchase of your home, per The Mortgage Reports. However, once you’ve established 20% equity in your house, you can request that your lender remove the insurance from your loan, saving you the typical 0.2%-2.0% PMI on the loan per year. According to The Balance, lenders are required to automatically remove the PMI when your balance reaches 78% of the original value of your residence.
Rethink Your Payment Patterns
If the reduction techniques above don’t pan out and you can afford it, you can try to save money in the long run by shifting your payment habits. This won’t decrease your rate or monthly payments, but will help you to save later by chipping away at the overall loan balance. According to The Mortgage Reports, by simply making one extra payment every year, rounding up your monthly payment to the nearest hundred or switching to a biweekly payment plan, you can reduce your mortgage payments by years.
Simply Ask for a Lower Rate
The most unconventional method to lowering your mortgage rate might be the most straightforward. As The Truth About Mortgage noted, lenders are like credit card companies — they want your business and will negotiate to keep it when you have interest rate concerns. Although it may be easier if your original loaner also collects your payments (rather than a third party) and if your current rate is substantially higher than market comparables, you may get lucky by simply calling your mortgage lender to negotiate a lower rate without the inconvenience of refinancing.
Like everything in life, it doesn’t hurt to ask.
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