The current housing market is a significant concern for many Americans, as home prices show no signs of decreasing in the near future. This means that housing costs, which are the largest expense for most Americans, are less affordable than ever.
Financial advisors typically suggest dedicating 25% of your monthly budget to housing, but the average American spends roughly 33% of their budget on housing costs, according to the Bureau of Labor Statistics. That means that many Americans are spending more than the suggested amount, further emphasizing the impact of the persistent rise in home prices.
Here are some options for getting your mortgage payments as low as possible.
For Prospective Homebuyers
If you’re in the market for a home, there are steps you can take right now to ensure your mortgage payments are low when you make your home purchase.
Increase Your Credit Score
Before applying for a mortgage, you should take steps to increase your credit score as much as possible. Having a high credit score will qualify you for lower interest rates, which means you’ll have lower payments over the life of your loan and can potentially pay thousands less in interest.
Some of the easiest ways to do this quickly include asking your lenders or credit card companies for a credit limit increase, which will improve your debt-to-income ratio; make credit card payments on time; or become an authorized user on the card of a relative or friend with good credit.
Make a Larger Down Payment
If you’re in the process of buying a home, make as large of a down payment as you can comfortably afford to do. You should aim to put down at least 20% to avoid having to pay private mortgage insurance, but if you can pay even more upfront, your mortgage payments will be lower down the line.
Buy a Less Expensive Home
If you’re deciding between multiple homes, choose the least expensive house that meets your needs. Perhaps it won’t have all the bells and whistles of your “dream home,” but it can lower your mortgage payments — a monthly payment that you’ll likely be making for years to come — so the sacrifice could be worth it.
Choose an Interest-Only Mortgage
If you won’t be able to make the full monthly mortgage payment right away, consider applying for an interest-only mortgage. With this type of mortgage, you pay only the interest for a fixed amount of time, and then pay the principal and interest payments for the rest of the loan term.
With an interest-only mortgage, your payments during the initial period will be lower than with a traditional mortgage, but be aware that they will be higher once that period ends to make up for the lower initial payments.
Get an Adjustable-Rate Mortgage
With an adjustable-rate mortgage, your interest rates will change over the life of the loan. They are typically very low to start, so this is a good option if you want lower payments right now. Keep in mind that rates will increase as the loan goes on, so make sure you will be able to make the higher payments when they kick in.
Opt for a Long-Term, Fixed-Rate Mortgage
The typical loan term for a mortgage is between 15 and 30 years, but some lenders offer 40- and even 50-year terms. The advantage of these loans is that your monthly payments will be lower.
However, it’s worth noting that the interest rate will be higher, so you will end up paying more over the life of the loan. You also will build equity in your home more slowly than you would with a shorter-term loan.
If You Already Own a Home
If you’re already a homeowner but your mortgage payments have become impossible to manage — or you fear you won’t be able to afford them throughout the life of the loan — don’t panic. There are steps you can take to decrease your mortgage payments.
Pay Extra When You Can
“If you have extra money available at the end of the month, you can pay down your mortgage, which will reduce your interest payments over the life of the mortgage,” said John Sweeney, founder and managing partner at Momentum Capital Partners. “Just be sure that the bank applies the extra payment to the principal, not the interest.”
If your down payment was less than 20%, you will have to take out PMI, or private mortgage insurance. This policy protects your lender in the event that you are unable to make your payments. If you are currently paying for PMI, work to eliminate it ASAP.
“It can add a substantial amount to your monthly bill and make it harder to reach that payment threshold,” said Logan Allec, CPA and owner of personal finance site Money Done Right. “However, PMI is required to stop once you reach 20% equity in your house. If you overpay on your monthly mortgage to reach 20% faster, then your monthly payments will go down. In this scenario, you are overpaying in order to set yourself up for lower future payments.”
Have Your Property Taxes Reassessed
Many lenders roll property taxes in with your monthly mortgage payment. If this is the case, you could save on your monthly bill if your property taxes have decreased. If the tax rate in your area or the current market value of your home have gone down, your property taxes should, as well. To find out if you qualify for lower property taxes, request to have your home reassessed by a local government assessor.
Find Cheaper Homeowners Insurance
Your homeowners insurance might be part of your monthly payment, which is deposited into your escrow account that the lender uses to pay your insurance and perhaps your property taxes. If this is the case, shopping around for cheaper homeowners insurance could reduce your monthly mortgage costs.
Rent Out Part of Your Home
Renting out a room in your home or guesthouse technically won’t lower your mortgage payment, but it will certainly help you afford it. Put those funds directly toward your monthly mortgage bill to pay less out of your own wallet.
Refinance Your Mortgage
Sweeney said the best thing you can do to reduce your mortgage payment is to refinance your mortgage.
“Of course, this requires that the interest rate you’re paying is higher than the current interest rate you can qualify for. But if you can reduce your rate, your house just got cheaper — simple as that,” he said. “The interest rate, which you can think of as the cost of the money you’re borrowing, went down. So you’re getting the same service for less money.
“The one caveat is that refinancing your mortgage resets your mortgage clock. So if you are five years into a 30-year mortgage, you will end up with a new 30-year mortgage.”
Increase Your Loan Term
Assuming you didn’t take out a 40- or 50-year loan to begin with, you could consider increasing your loan term. This will require refinancing — which means you’ll be paying off your mortgage for longer — but it could dramatically lower your monthly costs.
“You might consider switching from a 15-year fixed mortgage to a 30-year fixed mortgage when refinancing,” said Chris de la Motte, co-founder and president of digital mortgage marketplace Simplist.
Consider a Reverse Mortgage
A reverse mortgage is a type of loan available to seniors with equity in their homes.
“While risky, a reverse mortgage could be explored if you face dire trouble in paying your mortgage,” said Allec. “Under a reverse mortgage, you often won’t need to pay any monthly payment to the bank. In fact, the bank may actually pay you! However, the bank is paying you in order to buy your house back from you. With careful planning, a reverse mortgage could be a financial lifeline. Without it, a reverse mortgage could lead to losing your house, so proceed with extreme caution and consult a financial advisor before taking this path.”
Apply for Loan Modification
“If you’re dealing with — or about to deal with — financial hardship, you may want to consider applying for a loan modification,” said Leslie Tayne, founder and head attorney at debt solutions law firm Tayne Law Group. “Job loss or other crises can be a reason for your lender to restructure your loan to make your monthly payments more affordable.”
“You don’t need to be in default in order to make this work; however, it’s often a risky game and not guaranteed,” she said. “You also may want to take preventative measures by applying for a loan modification ahead of time, if you know you’re about to take a big income cut or face other financial hardship. Also, you may want to opt to try and work with your lender rather than default and deal with the modification process.”
Laura Beck contributed to the reporting for this article.
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