We all have good intentions when we set out to buy a home and budget for it. We imagine getting paid the amount we’ve come to expect and we anticipate paying bills on time … until life happens and things change. Careers change, things break down over time and pretty soon our monthly budget is a distant memory of good intentions. Maybe you’re looking to take control of your finances and you want to tighten up your budget and save some cash.
Whatever the reasoning, saving money on your monthly mortgage expenses is possible. We’ve pulled together a few strategies you can try to do just that.
What Goes Into A Monthly Mortgage Payment
Monthly mortgage payments are typically made up of five key components: principal, interest, mortgage insurance (if you put less than 20% down), homeowners insurance and property taxes. It’s important to note that actual costs depend on the lender and loan type and these are just a few examples of costs you might see on your mortgage statement.
Principal And Interest
For most, in the beginning of homeownership, the majority of your mortgage payment goes toward paying interest. As time goes on, more of your payment will go to the principal of the loan or the amount owed.
Insurance And Taxes
As a home buyer, you’re taking a risk by purchasing a home and lenders are taking risks by lending significant amounts of money to the public. Because of this, your lender will likely require a monthly fee to protect their investment. Private mortgage insurance or PMI protects the lender if a homeowner defaults on their mortgage. On an FHA loan, it’s referred to as mortgage insurance premium or (MIP).
Lenders will also require you to keep homeowners insurance current and to their specifications for the life of the loan. Lenders want to be sure that the home will maintain its value in case it needs to be sold to recover any past due balance if a homeowner defaults on their home mortgage.
Lenders also prefer that taxes are paid when they’re due. Lenders will hold the funds in escrow to ensure they are paid on time and are current. While a homeowner’s mortgage may be paid and current, if taxes are not paid, there could be a lien placed on the home.
Now that we have an idea of what makes up a monthly mortgage payment, let’s dive into how we can lower that amount.
Refinance Your Home
Refinancing your home is a great way to reduce your monthly mortgage payment if you’re in the position to do it. You’ll want to keep a close eye on the market. When rates are lower than your current mortgage interest rate, call your lender and discuss refinancing. If your current lender’s rates aren’t as low as you’d like, take the time to shop for the right loan product and interest rate that fit your financial goals.
A lower interest rate could be all the savings you need to make your budget bearable.
For example, Sam purchased a home for $200,000 with a 30-year fixed loan. Sam’s current interest rate is 4% and their lender can lock in a 3% interest rate. If Sam chooses to refinance, they could save $112 a month.
Buying Down The Interest Rate With Points
If Sam wanted to save even more, they could buy down their rate with points. Mortgage points are upfront prepaid interest paid as part of your closing costs to get a lower rate. Each point is equal to 1% of the loan amount. For example, on a $200,000 loan like Sam’s, one point would cost them $2,000 at closing. One mortgage point generally results in an interest rate reduction of .25% – .5%.
Refinancing can save you money, but be sure you’re looking at the bigger picture. If you plan to live in your home for a long time, buying points to reduce your rate could save you thousands over the life of your loan. If you plan to sell in the near future, it might not be worth the additional cost.
Consider An Adjustable–Rate Mortgage
If you do plan to refinance, you could consider an ARM. An adjustable-rate mortgage is a home loan with an interest rate that can change periodically if the market shifts. Typically, the initial interest rate is lower than conventional loan rates for a fixed period. After the fixed rate period is over, the interest rates on an ARM can fluctuate based on the interest rate index your lender follows.
You’ve probably heard of a 5/6 ARM, which has a 5-year introductory rate period where the rate is fixed. After 5 years, the interest rate can change every 6 months. Many lenders offer 5-, 7- and 10-year options.
You should ask your lender to explain how much the payments could increase after the introductory period before committing, depending on how long you plan to stay in the home.
Make Extra Payments
If you have funds to work with, you can apply it to your mortgage in a few ways to lower your monthly expenses.
Make A Larger Down Payment
When purchasing a home, the down payment plays a huge part in the future costs of the home. The larger the down payment on a home, the less money the home buyer will have to pay back. Putting down 20% or more of the sale price of a home will give you access to better loan terms, interest rates, and it will reduce your monthly payment.
Make More Payments
If you have a little extra money coming in from a side hustle or new job, you can make extra payments on your existing mortgage. If you do this, make sure to tell your lender you would like the extra payment to be applied to your principal. This won’t help with immediate financial distress, but over time these payments add up and can reduce your monthly mortgage amount. You’ll also be able to own your home faster or at least shave years off the loan which will save you money in the long run.
Get Rid Of PMI
If your down payment for a conventional loan was less than 20% of the sale price, it’s likely that you paid or are currently still paying PMI. Once a homeowner has accumulated 20% or more in equity, they can contact their lender to have PMI removed from their mortgage. Otherwise, it will come off automatically once 22% equity is reached in the home.
PMI ranges between .05% – 1% of the total loan amount.
For example, for a $250,000 home with a 10% down payment and a 4% interest rate, the monthly PMI premium would cost about $140 a month or $1,687 for 1 year.
To remove PMI, lenders have to follow the rules of Fannie Mae and Freddie Mac for conforming loans. If you believe you’ve reached the 20% equity requirement through making additional payments, increasing the home value through renovation, or if you feel that your home’s reached a level of appreciation to put you over the 20% threshold, apply or request for early PMI removal.
Government-backed loans like FHA, USDA, or VA don’t charge PMI. Instead, they may have mortgage insurance premiums, guarantee fees and funding fees, respectively.
FHA borrowers who were able to make a down payment of 10% or more must pay annual mortgage insurance premium for 11 years. If the borrower made a down payment of less than 10%, they will be required to pay the annualized fee for the entire life of the loan.
With a USDA loan, you pay an upfront guarantee fee which is equal to 1% of the loan amount and an annual fee. Rocket Mortgage® does not offer USDA loans.
VA loans have a funding fee attached. If the home buyer is a disabled vet (or the qualifying family member is disabled) and receiving disability benefits, they may qualify for the funding fee to be waived. If a veteran or qualifying member of the household closed on a home loan before receiving benefits, they might be eligible for a refund of the funding fees.
Comparison Shop For New Homeowners Insurance
Like we mentioned before, lenders will likely require a homeowners policy to be active and up to their coverage requirements for the life of the loan. Homeowners insurance premium costs vary state to state. The home type and its location play a big part in the monthly premium costs as well.
You can shop around for a better deal on your homeowners insurance policy premiums. When you’re getting a quote, be sure to let the agent know if you’ve upgraded your security system or made significant renovations that may have reduced your exposure to risk. The safer your home is from the elements, natural disasters and intruders, the more affordable your insurance premiums could be.
It’s always a good idea to call your lender prior to starting your search for new homeowners insurance. Lenders have minimum requirements that your new policy will need to meet. You’ll also want to ask how to change your homeowners policy because they may require certain forms or additional coverage. Be thorough in your planning and you can save money and time.
Challenge Your Property Tax Assessment
Many homeowners don’t know they can challenge their property tax assessments. Your tax bill is based on the assessment of the home’s value by the local municipality. If a homeowner feels their property has been assessed too high, they can challenge the property assessment.
Many towns have a policy that states if a homeowner doesn’t grant full access to the property, the assessor will automatically assign the highest value possible for the property type. Check with the assessor’s office and see if you’re able to walk the property with the assessor and give them access to the interior and any other areas you think might be able to prove your valuation is too high.
If you’ve exhausted options on your own, you can file a tax appeal. Filing an appeal will likely include a small fee. Some homeowners opt to have a lawyer file their appeal to ensure all deadlines are met and documentation is prepared properly. You may hear something from the assessor’s office right away, but in most cases prepare to wait. These types of appeals could take weeks to months for the reviewers to render a decision.
The Bottom Line: Stay Focused
When looking to save some money in your budget, you might be able to lower your mortgage payment by refinancing, getting rid of mortgage insurance, or shopping for better loan rates. With so many options, it’s important to focus on your long-term financial goals to guide you to success.
If you’re ready to explore options, talk to Rocket Mortgage through the Mint experience to see how you could lower your monthly mortgage payment.